The Malcolm Berko Blog

Dear Mr. Berko: I’ve been following Wal-Mart since November 1999, when I almost bought the stock at $60 a share. Since then, I’ve seen its revenues nearly double from $177 billion to nearly $300 billion this year. I’ve watched its earnings practically double from $52 billion in 1999 to maybe more than $100 billion this year. I could have bought the stock in 1999, just before the split, in the $60s and I would have nearly doubled my money, according to the Value Line charts. But I didn’t.
Do you think I should buy the stock today? Do you think it could double again in the next five years? Do you think it will continue to grow as fast as it has? I don’t own any retail stocks, and almost all of my holdings are utilities, the pipeline stocks you recommended two years ago, some convertibles and closed-end bond funds.
Please give me your opinion. I have a $7,000 certificate of deposit that will soon come due, and I would like to put this money into retail stocks.
S.L., Elgin, Ill.
Dear S.L.: I think you are reading that Value Line chart incorrectly. All those squiggly lines are prices that are adjusted to reflect Wal-Mart’s (WMT-$52) 2-for-1 split. So when you looked at the Value Line chart for November 1999, WMT had already split 2-for-1 in May 1999. If you had bought 100 shares in November 1999 at $60, you would still have 100 shares today at $52, worth $5,200, and a paper loss of $800. Still, WMT’s revenue and income growth have been super, but its share performance have been less so, as you can see.
I have no doubt that WMT will continue to grow and grow. But with 4.3 billion shares outstanding and trading at 26 times earnings, I feel the shares are much too pricey. If you wish to own WMT, I recommend you place an open order to buy the stock at $43, which is about 18 times next year’s expected earnings of $2.36 a share. Failing that, you might consider the following two issues that may have significantly better appreciation potential than WMT.
Dollar Tree (DLTR-$27) owns 2,610 discount variety stores in 47 states retailing $3.2 billion of stuff priced at $1. DLTR’s stores look like yesterday’s five-and-dime stores, offering a wide assortment of general merchandise. Each store has four employees, and families with incomes under $30,000 account for 55 percent of DLTR’s revenues.
On the other hand, the typical Wal-Mart family has an annual income in excess of $44,000. DLTR’s net profit margins of 6.7 percent are twice that of WMT, and their location costs (second-tier strip malls) per $1 of revenues are one-third that of WMT. Revenues and earnings have increased twelvefold in the past 10 years, shares trade at 16 times earnings and future earnings prospects look bright. And 100 shares bought in 1994 at $30 for a total of $3,000 would be 506 shares today worth $13,156, which is certainly better performance than WMT stock.
Family Dollar Stores (FDO-$29) has more than 5,600 stores in 47 states and expects to generate $5.3 billion in revenues this year. These stores are located in small, rural areas and the merchandise is generally priced under $10. FDO, which trades at 18 times earnings, has no long-term debt, plenty of cash, excellent earnings projections and a classy net profit margin of 5.2 percent. Because 1994 revenues have increased more than fourfold, a 100-share purchase in 1994 at $12 for a total of $1,200 would be 300 shares today valued at $8,700. Certainly that is significantly better than WMT.
Neither FDO nor DLTR spends money on advertising, and both rely on closeout and overrun merchandise. Neither can match the world-class technology of Wal-Mart nor its clout with retailers. However, DLTR and FDO run a no-frills, penny-pinching business while offering the same popular brand products, such as Gillette, P&G and Colgate, as Wal-Mart. While Wal-Mart stores are located on the outskirts of cities, FDO and DLTR stores are downtown or adjacent to a low- or middle-class neighborhood.
It’s certainly easier to shop near home than fight traffic for eight miles to the edge of town and then eight miles back. While parking at a WMT store can be like negotiating a battleground, parking at a DLTR or FDO is a cinch. Heck, a lot of folks I know shop at DLTR and FDO and, on occasion, I’ll pop into a parking lot to spend $20 on sundries. It’s certainly more convenient, quicker and cheaper than Wal-Mart.
FDO expects to open some 500 stores and DLTR should open 400 stores this year. While the imposing Wal-Mart name appears intimidating, DLTR and FDO are profiting like Croesus on the customers WMT leaves behind.
Please address your financial questions to Malcolm Berko, P.O. Box 1416, Boca Raton, FL 33429 or e-mail him at malber@adelphia.net.
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