Sunday, January 30, 2005

A Blue Light Special

Last week I wrote about AT&T (NYSE: T) and the value that I saw in the company. A few days later SBC Communications came in and said they see the same value. They want to buy AT&T. AT&T shares jumped around 7% on the announcement. T did not however jump above the resistance level of $21.00-$21.35. So, this resistance level still holds and is still valid.

The above is all just speculation. I don't know if the deal will go through or not. It's difficult to see how the anittrust regulators would allow this deal to go through. I have seen crazier things happen. This could however bring in a buyer on a smaller scale that the FCC would allow to go through. There could even be a possible bidding war.

This week I will bring another large cap name to your attention. The company is a member of the Dow 30 and the largest retailer in the US. I'm obviously talking about Wal-Mart (NYSE: WMT) with a market capitalization of over $220 billion. The operations of Wal-Mart are split up into three segments: (a) Wal-Mart Stores (b) Sam's Club (c) International. Wal-Mart is huge and everywhere.

Wal-Mart supercenters are popping up all over the place. Value line indicates that these new supercenters now account for 60% of it's domestic selling space and will increase to 70% by 2007-2009. WMT is creating 240 to 250 new supercenters by FY 2006. Wal-Mart has already taken care of K-Mart and other shopping centers and now they want the grocers business as well. They are now succeeding in taking some market share from these supermarket companies. I've even seen Sam's Club gas stations. Watch out OPEC! Wal-Mart's coming for you!

Operating income from international business increased 39% given the favorable impact of foreign currency rate changes. Wal-Mart has also continued it's acquisitions of foreign companies to continue their growth into these countries.

Nobody wants to mess with Wal-Mart. Let's take a look at some of the fundamental data:

P/E 22.9 = No, according to Benjamin Graham the P/E should be at least below 20

Price/Book 5.01 = No, BG criteria necessitates a P/B value below 1.5

Current Ratio 0.872 = No, the CR should be above 2.0 according to BG criteria

Revenue Growth 13.50 (10-Yr Avg.) = No, BG would look for RG of at least 15%

Intrinsic Value $62 (S&P Valuation) = Yes, BG would like the possible 19.23% appreciation

Yield 1.00%

WMT passes only one of my Benjamin Graham tests. That doesn't bode very well for the value investor. The revenue growth and P/E ratio were pretty close to passing, but no cigar. The Guru Analysis page over at gives WMT a Benjamin Graham value score of 43%. The strict value investor should look elsewhere. I believe serious long-term investors should take another look.

Value Line gives WMT share price projections of $95-$115 for 2007-2009. I would tend to agree. Being a long-term investor, it is always a good idea to keep an eye on the "big boys". The Dow 30 contains a lot of these top dogs. Value Line Research covers these stocks for the public for free. They provide an invaluable service. You should definitely look over their free reports. Your local library should have the all of the Value Line research reports.

Looking at the long-term fundamental picture for Wal-Mart should make many investors excited. My readers will be happy to know that the technical picture looks just as good. As always we will first take a look at the monthly view to see the long-term trends that are taking place.

Click to Enlarge Monthly Chart Posted by Hello

The standout formation on the monthly chart is the assymetrical triangle that has been forming for the past four years. Wal-Mart broke out in 1997 at around $14.30/share. On 1/28/2005 WMT closed at $52.43, but the top of the triangle was at the very end of 1999 at $68/share. The current breakout area of the triangle is at around $55.50. So, taking a breakout from this region and using pure technical analysis; we could project a future cycle high of around (($68.00-$14.30)+$55.50) = $109.20. This technical analysis would conicide with the Value Line research.

Click to Enlarge Weekly Chart Posted by Hello

The weekly view doesn't really shed any more light on the situation. The only thing I can really spot is the triangle within the triangle that began at the beginning of 2004. Bot triangles currently have the same breakout point so it doesn't change my view at all. We should check out the daily moving averages to see if we can see any support or resistance anywhere.

Click to Enlarge Daily Chart Posted by Hello

Looking at the short-term daily chart we can see that the 50 and 200-day moving averages are both above the current stock price and relatively close together. When the 50 and 200-day are consolidating in the same region, that region is pretty strong. So, WMT might see some weakness for a while and could come back down and touch one of the support areas. You must always keep in mind that the longer term views always carry more weight.

In summary, I believe WMT is in a very good position for long-term capital appreciation. Any long-term investor should wait for a breakout to the upside of the assymetrical triangle.

Tomorrow I will describe how to correctly position WMT and all holdings within an entire investment account so that you are not taking extreme risk with any one position.

Taking a look over at GalaTime also gives us a clue that might help you make the decision to take a position in WMT. It seems that option activity has gotten pretty one sided. There are an increasingly large amount of calls from the professionals being bought for the Feb $50 calls. Hmmmmmmm.

As always this report is just for educational purposes. This report should only be part of your research. Do your own due diligence.

Best Regards,

The Soothsayer of Omaha


Anonymous Anonymous said...

The only issue I have with WalMart is its market capitalization of $220 billion. For the price to double it would have to become the most expensive company in our stock market. Microsoft and GE breached the $500 billion market cap, except to fall under their own weight. Of necessity an investor looks at how much it would cost to buy the entire company en toto. Whether investor would be willing to pay an additional $220 billion for WMT years from now remains to be seen. The question is moot if inflation picks up. Fifty years ago a stamp cost 3 cents, now it's 37 cents for essentially the same item. $500 billion for WMT might seem cheap years from now.

4:30 PM  
Anonymous Anonymous said...


You are also assuming a constant number of shares outstanding. Wal-Mart has been keeping up with a share repurchase program and I believe that this buying program will continue and maybe even increase in the future. Also, never rule out a split.

The 2007-2009 projection was Value Line's projection. One rule of technical analysis is to give price or time projections, but never both.

Thanks for the comment. I hope others follow your lead.

Best Regards,

The Soothsayer of Omaha

7:16 AM  

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