Wal-Mart: Behemoth Buy

03/10/2014 7:00 am EST

Focus: STOCKS

John Buckingham

Editor, The Prudent Speculator

Although investors were disappointed with recent results from this leading retailer, value investor John Buckingham, of The Prudent Speculator, remains bullish on the stock's long-term prospects.

Shares of Wal-Mart (WMT) fell after the discount retailer reported non-surprising Q4 fiscal 2014 financial results (which it had pre-announced).

However, investors reacted quite negatively to the company's fiscal 2015 EPS guidance of $5.10 to $5.45 per share, which was well below the consensus estimate of $5.54.

The holiday season was extremely competitive and the harsh winter, which has been experienced by a number of regions in the US, has cut into early calendar 2014 sales, as stores have had to be closed and consumers have stayed home.

Additionally, increased energy costs in many of these areas, coupled with a reduction in food stamp benefits, have squeezed lower-income shoppers, which have either cut back on basics or headed to many of Wal-Mart's dollar-store-concept competitors.

While many chose to focus on the short-term headwinds, we still believe there is solid long-term opportunity in WMT and we are positive on management's efforts to cut costs, add products to its shelves, and address changing shopping habits (as a growing number of consumers view bigger-ticket items in the store and then purchase online) by investing heavily in e-commerce.

Also, the company now expects to add between 270 and 300 small stores this year—effectively doubling its prior estimate—to the 366 it already operates in the US.

We like that it seems many of the new small store concepts will be fitted with gas filling stations and pharmacies to drive traffic. Finally, we are still quite constructive on WMT's international business opportunities and are pleased to see management continue to restructure and improve this segment.

While there is no doubt that course changes will take some time to bear fruit for this behemoth retailer, we think this historically defensive stock has a place in almost all equity portfolios.

Strong free-cash-flow generation will support the business investment plans and will allow management to continue to buy back shares and increase the firm's dividend. WMT currently trades for 13.6 times forward earnings estimates and offers a 2.6% dividend yield.

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