Wal-Mart Stores, Inc. (NYSE:WMT) stock is trading around $72 a share. The company’s stock price has declined 13% in the last 3 months while the S&P 500 is up about 1%.Wal-Mart’s price-to-earnings ratio is just 14.7… You can buy the largest discount retailer in the world for just 14.7 times earnings. This is a rare opportunity to pick up a high quality business with a strong competitive advantage for a bargain price.

Wal-Mart operates 11,489 stores in 27 countries. The company employs over 2.2 million people globally. Wal-Mart was founded in 1962 by Sam Walton. Today, Wal-Mart generates sales of over $480 billion a year and has a market cap of more than $230 billion.

Investing for Long-Term Growth

The job of management is to maximize long-term shareholder value. Wal-Mart’s management is taking a long-term view; something that is difficult to do thanks to pressure to hit quarterly profit numbers.Wal-Mart is investing in its associates, in its supply chain, and in its digital capabilities. The company has already boosted all employees’ wages to at least $9.00 per hour. By April of 2016, all employees will earn $10 or more per hour.Wage raises will help to eliminate the stigma of working for Wal-Mart. Wal-Mart is already seeing an increase in applications. Higher demand for Wal-Mart jobs will likely translate into less turnover, which will save the company money in the long-run. In addition to wage raises, Wal-Mart is also investing in longer training time for its employees to provide better service for customers.Infrastructure investments hurt short-term profits, but will strengthen the company’s price-based competitive advantage in the long-run. Wal-Mart’s investments in infrastructure will speed delivery to stores, reducing loss from expired items and perishables.

Wal-Mart’s strong supply chain has always been an advantage for the company. Investing in improving the supply chain will be a net gain for long-term shareholders.Wal-Mart is also investing heavily in digital capabilities. Wal-Mart Labs is the company’s tech hub. Wal-Mart Labs is based in San Bruno, California; not in Bentonville, Arkansas. The separate location shows Wal-Mart Labs autonomy from the corporate office. Wal-Mart Labs handles the data science for Wal-Mart. The company is rapidly growing its digital sales. Wal-Mart now generates $12 billion in digital sales… And sales are growing at 17% annually.You will notice that Wal-Mart is not focusing on opening the maximum amount of new stores possible. Instead, the company is strengthening its competitive advantage and investing in systems for future growth. Once the big initial investment push is complete, Wal-Mart will return to focusing on building new stores. The company has opportunities for smaller stores in the United States as well as more stores in general internationally.

Geographic Revenue Breakdown

Wal-Mart generates 62% of its revenue from U.S. Wal-Mart operations, 27% of revenue from International operations, and 12% of revenue from its Sam’s Club operations.Despite years of emphasizing international growth, the bulk of Wal-Mart’s business still comes from the United States. The company’s supply chain is strongest in the United States. Wal-Mart has large presences in other countries as well – especially Mexico.Over the long-run, Wal-Mart’s growth will come disproportionately from international markets. Wal-Mart cannot open an unlimited number of new stores in the United States.

Wal-Mart’s Competitive Advantage

Wal-Mart’s competitive advantage is its “Everyday Low Prices” strategy. The company is the price leader in retail. Wal-Mart is the largest retailer in the world. It commands the best prices from its suppliers. The company pressures suppliers to lower their prices and then passes savings on to consumers which results in a positive feedback loop.Wal-Mart’s efficient supply chain helps the company save money on transportation. The core philosophy of Wal-Mart is to give customers the best deals possible. That is what the company is based on, and that is how Wal-Mart has grown to be so successful.Wal-Mart’s competitive advantage is very easy to grasp. The company’s business model is very simple. Warren Buffett is an advocate of easy-to-understand businesses with strong competitive advantages. Perhaps that’s why Wal-Mart is one of Warren Buffett’s largest holdings.

Growth Prospects

Wal-Mart grew earnings-per-share at 6.25% a year over the last decade. The company’s growth has slowed significantly since 2011. The company has struggled through negative publicity from paying low wages, stocking issues, and less-than-clean stores.Wal-Mart has largely saturated the United States market with its supercenter stores. The company still has opportunities with smaller stores. Wal-Mart is having success with its smaller Neighborhood Market stores. Neighborhood Market store sales grew 7.9% in the company’s latest quarter. Wal-Mart plans to open around 210 new Neighborhood Market and Express stores this year.The company’s investments into higher wages, infrastructure, and digital will propel growth going forward. Wal-Mart’s growth will likely continue to be mediocre through 2015 and potentially 2016. Over the long-run, the company should return to earnings-per-share growth between 6% and 10% a year. Growth will come from comparable store sales increases (1% to 3% a year), new store openings (1% to 2% a year), efficiency gains (1% to 2% a year), and share repurchases (~3% a year).

Recession Performance

One of Wal-Mart’s best attributes is its resistance to recessions. In 2008, the S&P 500 fell 38%. Wal-Mart gained 18% in 2008.The Great Recession of 2007 to 2009 did not impede operations.   Wal-Mart grew revenue, earnings, and dividends each year through the recession. Wal-Mart is among the most ‘recession-proof’ publicly traded businesses. The company’s “everyday low prices” are even more appealing to consumers during economic downturns than during normal economic conditions.

Valuation, Peer Analysis, & Final Thoughts

Wal-Mart is currently trading at a price-to-earnings ratio of just 14.7. Wal-Mart is the industry leader in discount retail, yet has the lowest price-to-earnings ratio of its peers. The price-to-earnings ratios of Wal-Mart’s peers are listed below:

  • Target (TGT): 20.5
  • Costco (COST): 26.3
  • Kroger (KR): 20.6
  • Home Depot (HD): 22.3
  • Best Buy (BBY): 15.0

Wal-Mart is significantly cheaper than its closest competitors, Target and Costco. The company is also cheaper than large grocer Kroger and big box home improvement leader Home Depot. Wal-Mart is even cheaper than Best Buy. Wal-Mart is very clearly undervalued relative to its peers at current prices.Wal-Mart has solid long-term growth prospects, a low price-to-earnings ratio, and an above-average dividend yield of 2.7%. Further, the company is recession resistant and has an extremely low stock price standard deviation of 19.1%. The company has an expected total return of 8.7% to 11.7% from dividends (2.7%) and earnings-per-share growth (6% to 9%). Wal-Mart has increased its dividend payments for over 40 consecutive years.Wal-Mart’s mix of growth, value, dividends, and stability make it a favorite of The 8 Rules of Dividend Investing. The company is a buy for any dividend growth investor looking for exposure to discount retail.

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