By  on January 14, 2005

NEW YORK — Despite Wal-Mart Stores Inc.’s stagnant stock price over the last five years, investment analysts say now is the time to snap up its shares as several positive catalysts stand to push the stock upward.

After enjoying a solid run-up from 1997 to 1999 — hitting an all-time closing high of $69.44 on Dec. 27, 1999 — the stock’s 200-day moving average has remained “range bound,” hovering between $50 to $60 during the past five years.

The shares closed 2004 essentially flat, and at around $53, the stock is currently down about 3 percent relative to the S&P 500.

It’s not surprising 2004 was a flat year for Wal-Mart’s stock: the retail environment was not overly favorable for the deep discounters. For Wal-Mart, double-digit, year-over-year increases in gas prices crimped spending on the firm’s core, low-income consumer. Those shoppers also may have been drawn toward dollar stores, or to Target Corp.’s increasingly competitive prices, analysts have said.

In addition, community protests against the opening of new supercenters as well as sexual discrimination and labor-related lawsuits continue to affect  the retailer’s reputation.

But analysts speculate that the renewed focus on apparel by Wal-Mart as well as international expansion opportunities could trigger profit growth in 2005, which could energize the retailer’s stock price.

Wal-Mart did not return calls seeking comment.

Ulysses Yannas, an analyst at Buckman Buckman & Reid, said the retailer has “reemphasized profits, and we can see that in the way they went through the process of Thanksgiving [by not initially cutting prices].”

Meanwhile, as the intense success of high-end retailers pushed luxury retail stocks into lofty territory — with the share price of Nordstrom Inc., for example, having risen 150 percent in the last two years — stocks such as Wal-Mart have become undervalued relative to the rest of the industry, experts said.

So analysts think the stock is due to see decent gains, especially since luxury stocks are projected to top out this year. Twelve-month target prices for Wal-Mart shares range from around $65 to $70.

“Over the next year, [Wal-Mart shares have] a very good chance of outperforming the S&P 500,” predicted Chris Graja, securities analyst at Argus Research, who has a “buy” investment rating on the stock.Paul Nolte, director of investments at Hinsdale Associates, said Wal-Mart’s stock “is the cheapest it’s been now since 1998,” currently trading at about 19.7 times expected fiscal 2004 earnings of $2.40 a share, according to Thomson First Call. That’s down significantly from the roughly 50 times earnings the stock saw in the late-Nineties bubble era.

Apparel is one key area that analysts expect will help fuel profit growth. Moody’s Investors Service estimates annual apparel revenues to be $33 billion at Wal-Mart. That would make up 8.7 percent of analysts’ total revenue expectation of $287.5 billion in fiscal 2004.

Deborah Weinswig, managing director of U.S. equity research at Citigroup Smith Barney, said Wal-Mart gradually improved the quality of its grocery products, thus attracting higher-income shoppers. As a result, Weinswig, who also rates Wal-Mart stock a “buy,” said, “They can do the same with apparel.”

International expansion in China is another way Wal-Mart can boost profits and please investors. Wal-Mart International plans to open 155 to 165 units in existing markets in fiscal 2005.

Of course with the stock market, nothing is a given and bulls can often turn bearish on a sector, or even on a particular stock. Hinsdale Associates’ Nolte recommends playing Wal-Mart’s stock as “a pure hedge.”

“The problem you have with Wal-Mart is the size. How big is this company going to be able to grow?” Nolte said. “If it does break out of its trading range and gets into the mid-$60 to mid-$70 over the next two to three years, that would be evidence of the success of international growth.”

To access this article, click here to subscribe or to log in.

load comments
blog comments powered by Disqus