Wal-Mart (WMT) shares are a “Strong Buy” declares Raymond James analyst Budd Bugatch in a 140-page initiation of coverage note today entitled “Welcome to the Machine.” Bugatch’s price target is $63, roughly 14 times his earnings per share estimate of $4.42 for the fiscal year ending January of 2012.
The big obstacles — a disastrous economy, food deflation, and lower gas prices — are already moderating, notes Bugatch, while the changed tone of consumers — trading down — will last for some time to come, which means Wal-Mart should be able to hold onto those shoppers its won during the recession. Squeezing productivity out of workers and moderating real-estate costs should help boost operating profit in years to come, adds Bugatch.
So what’s not to like? The stock has seen lots of multiple compression because investors don’t like the low-margin businesses Wal-Mart’s expanded into. That’s probably run its course, thinks Bugatch. The company gets $9 billion of supplies from China; any change in the exchange rate policy for China’s currency would drive up dollar costs for Wal-Mart. And health care reform legislation could add costs for the company.
Oh, and the various complaints about Wal-Mart as a social villain? “While the critical voices remain, we think that investors now face less headline risk from Wal‐Mart�s critics and naysayers than was the case several years ago.”
Wal-Mart shares today are up 86 cents, or 1.6%, at $53.74.
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