Should You Add Wal-Mart to Your Shopping Cart?

Wal-Mart (NYSE:WMT) has always enjoyed support from legendary value investor Warren Buffett. Recently, his company Berkshire Hathaway (NYSE:BRK.A & NYSE:BRK.B) bought 1.7 million shares of Wal-Mart, adding to its already significant position. Just because the Oracle of Omaha bought it, does that mean you should too? Let's use our CHEAT SHEET investing framework to decide whether Wal-Mart is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.

C = Catalysts for the Stock's Movement

Wal-Mart reported mixed results in its first quarter earnings announcement last month. The company attributed weaker than normal comparable-store sales growth—a 1.4 percent decline—to its less-than-stellar earnings report. The decline wasn't all that surprising as the retail giant's core low-income consumers were hit with a 2 percent increase in payroll taxes and delayed income tax returns. The stock has trended downward since the disappointing earnings announcement. It is currently trading at around $75.50 after hitting a 52-week high of $79.96 in May.

E-commerce is an area where Wal-Mart can achieve solid growth in the next few years. Wal-Mart reported that its first quarter online sales rose 30 percent. Online sales rose more than 40 percent in Brazil, as Wal-Mart's website became the most visited e-commerce website in the country. Additionally, Wal-Mart recently purchased a controlling interest in Chinese online retailer, Yihaodian. The retailer has begun offering same-day shipping to China's biggest markets, including Beijing and Shanghai.

Wal-Mart's smaller 'Neighborhood Market' stores offer strong growth potential, as well. These smaller format stores will allow Wal-Mart to establish a presence in dense urban areas where real estate space is an obstacle. With the construction of 500 stores by the end of 2016, Wal-Mart will suppress competition from dollar value stores like Dollar Tree (NASDAQ:DLTR) and Family Dollar (NYSE:FDO) in metropolitan areas. Additionally, they have a distinct competitive advantage over urban grocers like Safeway (NYSE:SWY), because they can sell their products at lower margins.

According to estimates, Wal-Mart is projected to achieve a five-year earnings growth rate of 9.29 percent; however if Wal-Mart can establish a dominant e-commerce business in the BRIC countries and finds success with its Neighborhood Market stores in the U.S., its five-year earnings growth could easily approach between 10 and 12 percent.

E = Excellent Relative Performance to Peers

While Wal-Mart has around six times the market cap of its chief competitors, Costco (NASDAQ:COST) and Target (NYSE:TGT), these companies are still big players in the industry. Based on price-to-earnings multiples alone, Wal-Mart seems like the best value; it doesn't hurt that the company's forward dividend yield is the highest at 2.6 percent. Wal-Mart also has an excellent history of using retained earnings to buy back shares, which benefits investors on top on an attractive dividend yield. Costco and Target both have higher five-year growth estimates than Wal-Mart.

	Wal-Mart	Costco	Target
P/E (NYSE:TTM)	14.88	24.11	16.18
Gross Margin (NYSE:TTM)	.25	.13	.29
Growth Est. (5 yr.)	9.29%	13.47%	11.06%
Dividend Yield	2.6%	1.1%	2.5%

Conclusion

One question to ask yourself when deciding whether or not invest in a value stock is "how stable are its key metrics?" Wal-Mart's management has done an incredible job over the last several decades at preserving both Wal-Mart's gross margin and return on equity. This stability is probably the main reason why Wal-Mart has enjoyed permanent seat at Warren Buffett's proverbial table for the last several decades. For investors seeking long-term stability and growth, Wal-Mart is an OUTPERFORM.