3 O'Clock High: Grading Wal-Mart
"Wal-Mart is a -1... excuse me... WAL-MART IS A SELL! ALERT! ALERT! DEAD MONEY!"
Minyanville doesn't do advice. We are about education. We are about the process and the craft of forming informed, fully-developed financial opinions of your own. Where the standard, "Buy, Sell or Hold" construct pretends to offer sustenance, we seek to teach our readers how to bring home food for themselves.
I'm fully "on-board" with our mission. That said, from a marketing perspective, it occurs to me that there is an appetite for recklessly offering half-assed opinions with a paper-thin veneer of rigor.
Introducing the Jeffmacke Magic Stock Pickin' System (JM's PS)!
We're going to dive right in by applying the screener to our thorny Wal-Mart (WMT) problem. Wal-Mart is the largest retailer in the world. An argument could be made that, "as goes Wal-Mart so goes America." As is the case with our country, the pesky national tradition of "Democracy" allows for a rich diversity of opinion on Wal-Mart, both as an entity and as stock.
Clearly there is the need for some fool-proof method of reducing this issue to a single number. JM's PS runs through the fundamental and societal challenges facing Wal-Mart and ranks them on a scale which ranges from -10 to +10.
All negative numbers are "Protestors." Positive numbers are "Goon Squad Members" or simply Goons. If the Goons outnumber the Protestors, Wal-Mart is a buy. If the reverse is true, stick up for the Little Guy by selling your Wal-Mart.
It's just that easy.
Wal-Mart does a billion dollars in revenues per day. Years ago, when John Chambers suggested that Cisco (CSCO) would grow roughly in line with the GDP of America, he was simply demonstrating the wildly over-blown perception of self which was so common in Valley CEO's of the time.
Wal-Mart is a different story. The company has few places left to go in America in terms of growing square footage and has yet to get meaningful traction abroad ("meaningful" being a relative term for Wal-Mart). They are trying to ameliorate the problem by expanding upscale into higher-end electronics, apparel and food.
Apparel may ultimately help on the margin front but Wal-Mart will be very lucky to grow at double digits on the top line consistently. Growth is the least ambiguous negative for the company.
Score: - 7 (Seven Protestors).
Wal-Mart has been a perennial for the top spot in America's Most Admired Company polls for as long as corporations have been ranked.
Noting that fact in Bentonville these days is done in the same tone Nebraska football fans talk about national championships: "What have you done for us lately?"
Not much, as it turns out. Wal-Mart was absurdly slow in getting on the fashion bandwagon, which Target (TGT) and others had used to run WMT over for the last decade. The company is staggering under the weight of ugly and previously unheard of scandals involving executives, board members, internal memos and just about anything hideous you can think of that doesn't involve Pamela Andersen.
The hits keep coming. Though Wal-Mart is showing signs of life on the social controversy front (see below) they continue to have one marketing trick which they are using to diminishing effect. Price Cuts aren't a strategy, they are a flier you stuff in the Sunday paper.
Score: -3 Protestors (though it's tempting to give them zero for not seeming to have a strategy at all).
I think Wal-Mart has flipped the switch on the PR front. For years zoning boards across the country have fought WMT effectively on a local level while Bentonville seemed to be under the impression that they were widely beloved and, thus, had no problem. They are still a little new at the game (note to WMT: Stop being candid in memos) but the company has firmly taken control of the "Is Wal-Mart Evil?" debate.
Wal-Mart's little EconoFest '05 may have had all the scientific merits of a tobacco industry health study but it exposed the fallacies of the, Ban Wal-Mart statistical case ("Prices Falling" more than offsets the economic impact of losing a local sporting goods store to a community), and was likely good enough to create a little backlash on behalf of the company.
I think the Stop Wal-Mart orgs are about to find out what Newell Rubbermaid (NWL) and about 1,000 dead retailers have known for years: Wal-Mart didn't get to be the biggest retailer in the world by letting themselves get pushed around by anybody.
Score: +5 Goons
Business Momentum vs. Sentiment
You can't score Wal-Mart the way you would Abercrombie and Fitch (ANF). You can't even score them the way you would Target (TGT).
Wal-Mart isn't growing fast or executing well by their traditional standard but no one expects them to do so. When Wal-Mart pre-released their upside surprising 4.3% SSS gain for October there were plenty of flies in the ointment. Gas accounted for .3% of the gain simply by inflating. Wal-Mart doesn't make any real profit on gas.
What's more, the company said that sales were led by margin-lite food while higher-margin softer goods lagged. On top of that Wal-Mart's Christmas Price Slash came at the beginning of October this year, vs. post Black Friday (NB: not celebrated in Canada) after Thanksgiving '04.
The company actually should have done much better on SSS, which don't measure profits. Judging by the Shiny Happy Stock Buying reaction to the October numbers, it won't matter that Wal-Mart started promoting Christmas on Halloween this year, when November sales are released.
The Street expects lower prices and flat results from Wal-Mart. Whenever the company can provide an upside surprise on either one of those fronts it figures to help the stock. WMT has been dead-money for more than 5 years and it's an insanely popular "core holding" in portfolios all over the country. People are looking for an excuse to buy the stock.
Score +4 Goons (it made for a good trade but Wal-Mart is going to need to do more than be "Not Horrible" to break out of their range).
There you have it! In a hammer and tong fight to the finish which would have made Cesar Chavez proud, the Jeffmacke Magic Stock Pickin' score for WalMart is -1; a hard-won victory for the forces of protest over the jack-booted corporate thugs who would repress them.
Not that we need any further explanation, what with our decisive minus-one, but there is some evidence that Wal-Mart has stemmed the downward tide of at least the most glaring of their recent problems. The issue with the stock is one of risk/reward. At their size, Wal-Mart has to be very good simply to avoid moving backwards. Though they can (and have) financial-engineered decent EPS gains, there is simply no masking low single digit revenue growth.
Like a rotund guy trapped in an elevator, Wal-Mart can turn around all they want but there really isn't anywhere for them to actually go. To the extent that they are successful in electronics and apparel WMT will have a negative impact on other retailers but that's a hard, slow-growth road.
Wearing my Minyanville hat (read: not advising) I think Wal-Mart makes a lousy long candidate but, in contrast to the beginning of '05, I don't see a huge amount of downside risk.
How long can such a huge company, one that represents much of what simply Is of America (good or bad) remain a dead money investment?
A lot longer than most people think.
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