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Steve Bauer

Steve Bauer

Steve owned a privately held asset management firm and managed individual investor and corporate accounts as a Registered Investment Advisor - for over 40 years.

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Investing Wisely -- WMT - An Excellent Bellwether Company

A Brief Intro: My focus is Investing Wisely, e.g. taking advantage of the Bull / Bear Cycles as they occur within the overall marketplace. Integrating modern analytics within these Cycles means maintaining a process of the thorough fundamental analysis of many Companies in my universe. I believe that this discipline provides the necessary clarity regarding the rotation that most all Companies goes through - from favorable times to unfavorable times and perhaps back again.

The current market capitalization of WMT is over 220+ billion, making it the 5th largest Company in the U. S. and Wal-Mart is now the biggest revenue producing U.S. Company with Target (TGT) and Sears Holding (SHLD) being 2nd and 3rd.

The company has excellent management that caters to cost conscious consumers, and operates a highly stable business. It currently trades with similar characteristics to other leading companies within its sector.

It has maintained a consistent record of surpassing most analysts' quarterly earnings estimates. Therefore, one could conclude that it is highly unlikely that any future pullback will be severe.

Timely and positive news is that Wal-Mart will have unbeatable prices on toys for the holidays. These guys are super smart.

As a Sector, the Consumer Services / Retailer component companies have always been problematic for investors to profit from. This is likely due to the revenue-dynamics making accurate evaluations often tough to figure. Typically, at the bottom of an economic cycle, they can appear to have relatively high P/E ratios. However, when the economy improves and appears to be topping, the P/E multiple then tends to shrink.

This perhaps explains why many companies trade for high multiples (perhaps 30 or 40 or more times profits) during bad economic times, and end up trading for less than ten-times profits when earnings growth having fully taken advantage of the improved economy.

So, with regard to Wal-Mart we can't blame the economy or the revenue-dynamics, at least for the present.

My analytic focus (to invest or not to invest) on any company is heavily weighted on fundamentals. Wal-Mart appears to have the prospect of improving earnings in the coming quarters, and is positive in most all other categories of my financial analysis work. Therefore, unless the price skyrockets (highly unlikely) the shares are currently and should remain trading at a relatively low multiple.

Wal-Mart Share Chart

The "Corporate Governance" for WMT is: Board (Low Risk), Audit (Low Risk), Compensation (Low Risk), Shareholder Rights (Low Risk).

As for the Financial Statements, all looks quite positive. In summary, Wall-Mart's Revenue, Operating Income, Net Income and Balance Sheet all increased / improved. The results benefited, to some extent, by currency exchange rate variations and to a significant extent by a one-time tax benefit. The decline in U.S. same store sales are what concerns us the most for the future. International operations remain very positive.

The price activity of Wal-Mart has continued to improve from the May lows. You may remember, in mid March WMT broke down from 55 to 48. It is now back to its March highs. That's quite an important consideration. However, this most recent rally has placed Wal-Mart in a possible over extended position and means it could be topping again.

Wal-Mart Price Target: My Valuation uses WMT's current multiple (P/E):

Fiscal Year Est. Low / High
- Price Target Range
(U. S. Dollars)
Average Estimated
Price (U. S. Dollars)
Percent Change
from Current Price
1/2011 55.6 - 56.8 56.3 4.4%
1/2012 59.1 - 64.4 61.7 14.5%

Most Financial Analysts determine the Price Target Range by estimating a future earnings per share and then applying a price-to-earnings "multiple", also known as the P/E ratio. I calculate Price Targets for both the current and next fiscal year by applying the stock's present multiple to the average professional analyst's estimate.

For a current (Up to the Minute) Chart of Wal-Mart, click and scroll down here.

To view my current Forecast (right here in SA) on Wal-Mart, click here.

There is always a concern or question as to what the U. S. Federal Reserve Board may or may not do regarding the management of the economy. We do know that an election is coming and history confirms that little is done proactively ahead of an election. We also know that rallies have come when the Fed injects capital or a fiscal stimulus into the economic system, but that is becoming an "old news" factor.

We also know that WMT is a big player internationally and that in today's economic picture it's important to take that into account before investing. The global economy is ragged to say the least. A projected economic slow down suggests that anything with international exposure that looks like a bubble could be a suspect investment. Wal-Mart, fundamentally, is definitely not in a 'Bubble'.

So while the General Market may be in for a pullback, the prevailing question from most investors is: How big will it be? Do I hold my current positions or do I sell? Etc. The answer will be obviously quite clear when it (the pullback) is over but an old axiom tells us to be prudent in times like this. You might want to remember that, cash is always an excellent safe harbor. However, if you are a proactive investor, taking bearish positions may be also being wise.

My Wrap: I believe a correction is coming and when it does it will likely affect Wal-Mart and many other securities. So, the second question is always - when? The answer to that question is one that we can be sure of: that is, there will be future rallies and pullbacks as the marketplace cycles. You can easily confirm this by simply looking at historic long-term charts of the stock market itself or just about any company or ETF. The point is, and we all know, that they (Indices and Securities) all go through "cycles" in one manner or another. Typically, when over-extended prices occur, they turn down. The opposite is also normally true - when over-contracted prices occur, they turn up. The trick for me is to have a methodology in place that both takes advantage of these facts and also offers a consistent and high probability of profitable - future investment decisions. That's why I have always started my analytics with detailed fundamental analytics of high profile companies like Wal-Mart. I believe that WMT and its present fundamentals are an excellent leading indicator for the Consumer Services / Retailer Sector.

Smile, have fun - Investing Wisely.

Source Information: Bauer Capital Management, Bloomberg, CNN Money, Fortune, MSN Financial, RiskMetrics Group, Seeking Alpha, StockCharts, Reuters, Yahoo Financial, Worden.


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