The shocking US jobs report last week, combined with the deteriorating housing market and record petrol prices, mean there are now serious concerns that America will fall into recession. Such pessimism may prove premature, given that second-quarter GDP grew at a 4% clip; but it can’t be denied that the US economy is cooling. In this more frugal environment, with debt-laden consumers tightening their belts and becoming increasingly price conscious, one stock stands out:
Tip of the week: Wal-Mart (NYSE:WMT), tipped as a BUY by UBS
This behemoth, which took in revenues of $349bn last year, was founded 60 years ago by Sam Walton. It has three core divisions: US stores (64% of sales), Sam’s Club (12%), and International (24%). Its strategy is simply to offer “a huge range of good-quality merchandise at the lowest possible prices”. The group’s price leadership in all its markets has been hugely successful, generating excellent returns for shareholders.
But even the best firms occasionally run into quicksand. Over the past four years, on the back of rising property prices and cheap debt, consumers have splashed out on luxury items and brands instead of shopping at Wal-Mart. This has hit growth, culminating in disappointing second-quarter results and a minor profits warning in July, which shaved 3.2% off the group’s 2007 earnings guidance. Wal-Mart’s lacklustre performance has coincided with unprecedented attacks by the media, pressure by unions to raise wages, and investor indifference to mega-caps. Such negative sentiment has seen the stock substantially lag the benchmark indices. Back in 2003, Wal-Mart’s shares traded at $55; they are currently below $43, a fall of 22% against a gain of more than 40% for the S&P 500. The decline is even more pronounced in sterling terms as the dollar has also devalued by 26% in the intervening period from £1.60 to £2.03 per dollar.
However, as the economic tide starts to turn more in Wal-Mart’s favour, I think the shares look oversold. The green shoots of a recovery are already in evidence. The firm saw a 3.1% rise in like-for-like sales for August, ahead of Wall Street’s 1.6% estimate, as it cut prices on back-to-school items. Total turnover in the past 30 weeks rose 8.5%, with the international unit growing at an impressive 16%, partly driven by its Asda chain in the UK.
Wall Street expects sales of $378bn this year and $407bn in 2008, delivering earnings per share of $3.04 and $3.40 respectively. That puts the shares on corresponding p/e ratios of 14 and 12.5, good value for such a defensive play. With the dollar at around 25-year lows against the pound, like the many UK shoppers heading for bargains in New York I believe it’s a great time to add this stock to your portfolio basket.
Recommendation: long-term BUY at $42.90 for the risk-averse
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments