April 24, 2005


There's an article mentioning Wal-Mart in Barron's(scroll down). I'll post the whole thing in the extended entry since its subscription only.

BACK WHEN WINTER was in full chill, we wrote a brief item on Wal-Mart. The gist of it was that the company, as a wise pal of ours put it, was "a great story topping out." The stock was changing hands at slightly above 51; Our friend, who's a chart fancier (but a very decent sort nonetheless) suggested that if it broke much below 50-51, roughly its then 18-month trough, it was in for trouble. Just how far down would it go?, we remember asking. And he smiled and shrugged. (Did we neglect to say our friend could be frustratingly enigmatic?)

He did point out that the company's formidable size and corporate reach could easily make the action of its stock a barometer for the consumer, the economy and the market. And in many ways, the shares, which have spent a lot of time recently in the 40s, have indeed been a barometer, particularly for the market.

Wal-Mart, the biggest retailer on the face of the planet, naturally came to mind as we were mulling the prospects of a consumer slowdown and the air seeping out of the credit bubble. The company already has been feeling a bit of pain, as the uninspiring performance of its stock intimates. Its customers, management often stresses, live paycheck to paycheck, and paychecks have been somewhat paltry the past few years.

Moreover, its customers often are off in the boonies and driving is their only means of getting from where they are to where they have to go, so they're highly sensitive to soaring gas prices. And the company is prone to cite those prices in shrugging off disappointing performance.

Wal-Mart has been growing, to be sure, but not at the brisk pace its many fans on the Street had grown accustomed to. What's more, there's reason to suspect that its trademark double-digit sales gains may be a thing of the past. And not just because towering fuel prices might be with us for longer than we like to think.

On this score, Jon Jacobs, who's the fixed-income maven at Cantor Fitzgerald and a shrewd scanner of the investment scene generally, offers some intriguing observations on what's in store for Wal-Mart. Jacobs holds that beyond the impact of gas prices, the company is vulnerable on several fronts to the possible further detriment of its sales, earnings and stock valuation.

More specifically, he zeroes in on four factors, three of them fundamental. Let's start with the one that isn't -- what the company calls "headline risk." As noted, Wal-Mart has been quite adept at attracting negative publicity, which management is actively striving to counter via ads and a PR blitz. Jacobs wonders, though, if investors sense that "after decades of successfully toughing it out against both labor unions and communities trying to restrict 'big-box' expansion" the company may be in for rougher going.

As he dryly notes, whether Wal-Mart "can continue employing the nuclear option against unionization at the same time it tries to burnish its image as a good corporate citizen is an open question."

Turning to his fundamental concerns, Jacobs raises questions as to how vigorously Wal-Mart can continue to grow, even apart from the so-called headline risks. How much can the company expand and how much more market share can it wrest away from the competition when it already boasts nearly half of total U.S. chain-store sales? "No one," he reflects, "can grow twice as fast as GDP forever."

Jacobs also worries that the increasing shift of Wal-Mart's overall sales mix toward groceries, a "notoriously low-margin business," will chip away at the company's overall profit margins.

Finally, he cites reservations that the "international growth story is not as rosy as Wal-Mart's past numbers and pronouncements indicate." A sizable chunk of international sales gains the past two years he traces to the favorable currency-translation impact of a falling U.S. dollar (which, for the moment, has stopped falling). Last fiscal year, the company reported foreign business, which chips in some 20% of the whole, rose a rousing 18.3%. However, strip away the benign effect of a devaluing dollar and the rise shrinks to 11.6%, or not much different from the gain in total corporate sales.

All of which explains why Wal-Mart shares have been trending lower for quite a spell now and why earlier this month they sagged below $50 for the first time in two years and touched a new low last Friday. (The P/E, we calculate, is around 17). Since none of these drags is apt to vanish any time soon, Jacobs reasonably anticipates they'll continue to weigh on the stock.

Posted by Bob on April, 24 2005 at 07:10 PM