Wal-Mart Sell-Off Is Buying Opportunity

We expect to lower our $79 fair value estimate for

The sell-off and market price of Wal-Mart’s shares imply that Wal-Mart’s recent investments in e-commerce and wages will be unsuccessful in driving profits long-term. We see this scenario as a possibility, but we believe that the market underestimates wide-moat Wal-Mart’s cost advantage and its ability to compete with an omnichannel model.

Over the long term, Wal-Mart continues to drive sales, which is essential to our thesis. The firm appears to be on track, as traffic (up 1.3% in the past quarter) and same-store sales (up 1.5%) continue to increase. Neighborhood market comps are increasing by 7% and e-commerce sales are increasing just below 20%. Wal-Mart announced that it expects sales to increase 3%-4% annually over the next three years, which is higher than our expectation of 2%-3%.

We expect to maintain our forecast for 1% same-store sales growth in the U.S. and slightly higher growth abroad, as we believe that lackluster growth in U.S. grocery and slowing economic growth in international markets will continue. Over the long term, Wal-Mart’s reputation for low prices and its cost advantages should allow it to lower prices and drive low-single-digit volume growth.

If Wal-Mart continues to grow sales as investments moderate over the next 12-18 months, which we've expected for a while, investors should still earn good risk-adjusted returns. Wal-Mart shares offer an earnings yield above 10%, so if Wal-Mart generates a 3% earnings-growth rate over the next several years (once investments moderate), we believe investors could realize a 10% return.

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