Wal-Mart’s Not a Bargain, but That Doesn’t Make It a Bad Buy

Stock Exchange gives readers a chance to listen in as staff writers James Peltz and Michael Hiltzik debate the merits of individual stocks and other investments.

Wal-Mart Stores (WMT)

Wal-Mart Stores, Monday: $68.81

Jim: We look today at the world’s biggest general-merchandise retailer. Wal-Mart is based in Arkansas and was founded by the late Sam Walton, who became legendary for being a billionaire who still drove his old pickup truck.

Mike: Thus explaining, in part, how he became a billionaire. More important, I’m not sure you could live in this country without being familiar with Wal-Mart.

Jim: That wasn’t true 10 years ago. Back then, Wal-Mart stayed out of the big cities and focused on smaller towns, where it was easier for them to stomp on mom-and-pop rivals. But to keep growing, Wal-Mart had to set up shop in the cities, which is why you now see their stores all over Southern California.

Mike: They also own Sam’s Clubs, which are like Costco and other membership-only discount retailers--though I’m hard-pressed to figure out who can’t be a member, except people who can’t scrape together the $30 or $40 annual fee.

Jim: What I find remarkable about Wal-Mart is how consistently it posts good numbers in spite of its huge size. Once again, let’s check out that important stat in retailing--”same-store” sales, or sales of stores open at least a year. Wal-Mart keeps kicking out solid monthly gains of 5% to 8%, month after month, year after year.

Mike: They did even better than that in September, with a 9.5% burst that beat the gains of Costco, Kmart and Dayton Hudson Corp.’s Target chain, which are all comparable operations.

Jim: Wal-Mart also handily beat the 4.5% average increase for retailers overall, and the company pulls this off despite having sales that will run close to $120 billion this year.

Mike: And I expect the story to get even better if there’s an economic slowdown.

Jim: Took the words out of my mouth. The U.S. economy is likely to slow sometime within the next two years, and that plays right into Wal-Mart’s hands because consumers will be tightening their belts. That means trying to save a few bucks by shopping at Wal-Mart.

Mike: It’s a classic defensive stock if you’re worried about the economy and the stock market falling off a cliff.

Jim: That’s evident now. While the rest of the market has struggled since mid-July, Wal-Mart’s stock--now in the mid-60s--has nearly doubled in the last 12 months. Think how many money managers would gladly take that performance right now.

Mike: There’s one other impressive thing about Wal-Mart: how it manages its expansion so that it doesn’t trip over all those new stores it keeps opening. For example, they have an annual technology and communications budget of $500 million, giving them cutting-edge technology to track what they’re selling, how many they’re selling, and how to restock their shelves without glitches. Wal-Mart is a paragon of this.

Jim: Wal-Mart also is a big reason we’re seeing troubles at some other retailers, like Toys R Us. Ditto the supermarkets, because Wal-Mart now sells lots of groceries. Wal-Mart is simply stealing business from them like they’re blind, because its huge size and big stores enable Wal-Mart to peddle lots of products at cheap prices.

Mike: Any downside to this stock?

Jim: It gives me pause that Wal-Mart’s shares, because of their big gains this year, now trade for about 35 times this year’s expected per-share profit. Wal-Mart is a premier company, but that’s still a little rich for a retailer earning 3 cents for every dollar of sales.

Mike: Well, don’t forget, that multiple shows people are willing to pay for Wal-Mart’s consistency of earnings.

Jim: True.

Mike: This is a solid performer, and it will continue to be a market leader, which is why Wal-Mart’s stock is a buy.

Jim: Agreed, and I wouldn’t let its price get in the way of buying the stock. Wal-Mart already is a blue-chip performer, and it could stand out even more if the economy goes bad.

Mike: Exactly. It’s a good inoculation against a recession.

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Do you have a stock you would like to see discussed in this column? Michael Hiltzik can be reached at michael.hiltzik@latimes.com; James Peltz can be reached at james.peltz@latimes.com. Or write to either at Business Section, Times Mirror Square, Los Angeles, CA 90053.