Doug McMillon, CEO of Wal-Mart International, asked in regards to the stock “is the street missing something?” In effect, he was asking what’s on the mind of every associate that has put in long hours and owns a boatload of the stock, which is “what’s gonna get the stock moving?”
As our readers are painfully aware, Wal-Mart stock has languished for over a decade despite impressive financial performance (read our explanation here) – more than doubling sales and EPS over the period, the last couple of years of which happened to be a worldwide financial meltdown.The answer to what will get the stock moving is simple.
Source: Company reports
Clearly, Walmart U.S. is the cash cow and International is the growth vehicle. But, the growth vehicle, even at $100 billion in revenue, only accounts for 19% of total operating income. So it is not big enough (relative to the total company size), nor can it grow fast enough to move the stock price meaningfully higher on its own at this moment.
For example, 10% growth from Walmart International adds 2% to the company’s overall growth rate. The company can also add another 1%-2% to its EPS growth rate by buying back shares. That gets us to 3-4% growth. Combined square footage growth at Walmart U.S. and at Sam’s adds another 1-2% to the total, bringing us to 4-6% companywide growth, potentially.
At a Price/Earnings Ratio (P/E) of 12 times this year’s estimated earnings of $4.00 per share, the stock is inexpensive. However, the 12 P/E is twice the growth rate (4-6%). An old rule of thumb is that paying a P/E of 100% - 150% of the growth rate is fair. Thus, in the near-term investors will only bid the shares up if there is a higher growth rate. That must come from same-store sales growth. With a base of $300 billion in annual revenues, growing same-store sales is the largest, most powerful lever for earnings growth and hence the stock price. Without same-store sales growth, the stock is unlikely to budge. Grow same-store sales and investors should respond by bidding the shares higher. Alternatively, Wall Street may value WMT higher if International and Sam’s were spun out, an analysis we’ll save for an upcoming issue. Source: Company filings
Bonus: Personal Finance Insight – Roth IRA Conversions for Executives
Misinformation regarding Roth IRA’s abounds. A Roth conversion can be a savvy move for those with very specialized situations or a financial train wreck for others. See our most important criteria for success plus a case study here.
Diageo PLC Pours Whisky into its Pension Fund
In an effort to shore up the deficit in its pension plan, the world’s largest whisky producer and Wal-Mart supplier has contributed via a partnership up to 2.5 million barrels of maturing whisky as an asset to fund retiree benefits. If the cash pension benefits come up short, at least retirees can drown their sorrows. The agreement filed with the SEC can be viewed here. Source: Plansponsor
Have Your Cake and Eat it Too
Helen of Troy Ltd. (18% or $116 million of $648 million total sales to Wal-Mart) sells products under the Brut, Sea Breeze and Vidal Sassoon brands among others. It’s CEO, Gerald Rubin, has a simple bonus plan. He owns 11% of the company and has collected about 11% of the entire company’s pretax profits over the past three years – $13 million to Mr. Rubin, other shareholders, not so much. Source: footnoted.com, company filings.
Paris, France to Marysville, Ohio is not a Lateral Move
Scotts Miracle-Gro (14% or $441 million of its $3.1 billion total sales to Wal-Mart) is paying Claude Lopez $100,000 to move from Paris, France to the Company’s Headquarters in Ohio to serve as president of global sales. Scotts threw in a hefty salary, plane tickets, company car, tax planning and other assorted perks. Source: footnoted.com
The Big Picture – Inflexion Point in China
Global retail and CPG companies are betting billions on the Chinese economy to deliver much needed growth to their businesses in the ensuing years. Evidence is mounting that China may be closer than many think to becoming a consumption-driven economy versus a production and export-driven economy. Thirty years of a one-child per family policy is now limiting supply into the workforce which, combined with the exhaustion in number of surplus agricultural workers transitioning to factory jobs, is resulting in a sharp rise in wages. Spending growth for consumer products should follow. Source: Financial Times
The Last Word
Nice little write-up on how some consumer products were named. Source: From Altoids to Zima: The Surprising Stories Behind 125 Famous Brand Names, Readers Digest
Why You Always Almost Win At Gambling
Manufacturers of slot machines use a technique called clustering to create a high number of failures that are “near wins.” Nearly hitting the jackpot induces the player to continue playing because they falsely believe that they have a good chance of winning. Scientists at Cambridge discovered that “the brain responds to near miss gambling outcomes in much the same way as it does to winning.” Source: Journal of Neuroscience, Scienceblogs.com
Quote of the Day
“Make a bet every day, otherwise you might be walkin’ around lucky and never know it.”
-Jimmy Jones
Have a thought or comment? Give us a call or email.
Scott Alaniz, CFA
Joe Chumbler, CFA
Rogers (479) 657-694
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