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Minyan Mailbag: Why Wal-Mart is a Good Investment


The trick lies in the capital expenditures.


I have to totally and respectfully disagree with your positive Wal-Mart (WMT) article.

Here are the numbers from last year:

Cash flow from ops: $17.6 bln.
Capex: $15.2
Free cash: $2.4
Enterprise value: ~$222
EV/FCF: 93x

I don't see how this is going to be a good investment, with those kinds of numbers. Maybe the capex is going to really pay off, as you say. Or maybe Wal-Mart is investing just to stay above water, as the sales numbers would suggest. You say SSS are going to be as much as 6%, but most of growth coming from low margin groceries. Right now WMT is trading at about 66% of sales. But most grocers trade at more like 20% of sales. And I wouldn't hold my breath on Wal-Mart appealing to a higher-end customer. How many retailers have successfully done something like that? I can't think of any.

Finally, I don't see the negativity on WMT that you see. Shorts are at less than three days and the put/call ratio is also relatively low.

We'll get a good idea who's wrong tomorrow. I'm betting it's you.

Minyan BJR

Minyan BJR,

I love disagreements - they make me think harder. Yes, 93 times free cash flows doesn't look cheap, right? Not all free cash flows are created equal. The trick lies in the capital expenditures. There are two types of capital expenditures out there: for growth and maintenance. If you think about it, a great chunk of oil company's capital expenditures go to find new wells which will replenish the depleting old wells. The mix of capital expenditures is tilted greatly towards the maintenance capital expenditures. If an oil company stops looking for new wells, it will be dead in several years.

For growth capital expenditures are a bit different in nature and this the bulk of Wal-Mart's capital expenditures. In my estimate, 80% of Wal-Mart's capital expenditures are for growth. They go to open new stores and distribution centers. If Wal-Mart stopped spending money tomorrow on growth capital expenditures, its sales probably would keep growing in low single digits for quite awhile and its free cash flow would go through the roof. Wal-Mart has a very respectable return on capital and thus, these capital expenditures are a good investment. I can understand the argument made that its return on capital will decline in the future as new stores compete with existing stores - a fair point, but it should be far in excess of cost of capital and be above the industry average.

On groceries. The whole idea of groceries is to get you into the store and if the merchandise is right (the premise of my argument) then consumers will be spending a lot more money on the higher margin products.

About the negativity around the stock: three out of the four largest holders are index funds, not active funds - that is a good tell (Mike Santoli taught me that) that investors are not excited about Wal-Mart's shares.
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