Attractive Risk/Reward Opportunity in Wal-Mart

We do not expect to make a material change to our $75 fair value estimate for

While Wal-Mart shares have bounced about 15% off lows, they still trade at a 12% discount to our fair value estimate. With an earnings yield above 6% (3% dividend yield) and the company repurchasing more than 5% of its shares outstanding each year, Wal-Mart's shares are priced to deliver solid long-term returns even if profits merely stabilize. Given that profits could again grow as wage and e-commerce investments moderate over the next one to three years, we believe the risk/reward opportunity in owning Wal-Mart is attractive in today's uncertain macroeconomic and market environment.

Our wide moat rating and long-term thesis--that Wal-Mart can leverage sales growth as labor and e-commerce investments moderate--remain intact. A key factor behind our thesis is that Wal-Mart's brand, despite much negative publicity, still drives traffic. In this regard, fourth-quarter results supported our thesis; U.S. same-store traffic increased 0.7%, representing the fifth consecutive quarter of traffic increases. Similarly, U.S. same-store sales increased 0.6%, representing the sixth consecutive quarter of positive comps and bringing the two-year stacked-comp growth rate to 2.1%.

Morningstar Premium Members gain exclusive access to our full Wal-Mart report, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.