Thursday, September 21, 2006

Sam Would Be Proud -- Wal-Mart

From Bentonville Arkansas, Sam Walton built one of the most remarkable businesses the US has ever seen. He delivered on the greatest selling pitch of all time:"I can get it for you wholesale." The rest of the retailing world could get it for you "wholesale" during "White sales," "President Day sales," "Inventory reduction sales," and "Lost our lease sales," but Sam and his disciples offered it to us every day. Sam did not "give it to us" in the sense that his detractors charge. He became our "buyer" and he was remarkable at passing along his volume discounts. My mother thinks Wal-Mart (WMT) is one of the greatest inventions of her 86 years. She does not understand that it is not politically correct to think that Wal-Mart does anything good. There are those who think that the blood has run a little thin at WMT since Sam died. Who knows maybe Sam has felt the same way, but not today. Today, Sam is looking down on the firm he started on that dusty parking lot in Bentonville so many years ago and he is happy. He is happy because his disciples have come up bold. And Sam knows destiny favors the bold. Today Wal-Mart announced that they will begin offering generic drugs at sharply discounted prices. Starting first in the Tampa area, they will offer nearly 300 generic drugs for a flat $4.00 per month. That news took about $5 billion out of Walgreen,CVS, and other drug retailers, but drew no response in WMT's price. I think this news is about as big a strategic move as I have seen a company make in a long time. Wall Street probably won't like the deal because it does not seem to drive very much to the bottom line. The Wal-Mart haters won't like it, well, because they know that Americans will love it, and their jobs just got tougher. California won't like it because this will likely clutter up their pristine streets with noisy, smelly cars going to Wal-Mart. But the bottom line is my mom is going to love it. The way I figure it, she will save about a hundred dollars per month when the program comes to Indiana. And speaking of Indiana, I would like to make the following plea to Wal-Mart: Dear Mr. Scott, Indiana is a big fan of Wal-Mart. We don't hang you in effigy; file countless nuisance lawsuits against your company; or fight you every time you want to open a store in the Hoosier state. Do my mom and other Hoosiers a favor and bring your new generic drug pricing program to Indiana after its rolling in Florida. My mom said she would cook dumplings for you if you want to stop by. Our model shows that WMT is about 20% underpriced and the biggest reason for the undervaluation is the incredible negative public relations battle that has been waged against the company. In my mind, with this discount generic drug pricing initiative, WMT, at least for the near term, has regained the high ground against their detractors. This company is growing 2-3 times as fast as most utilities, but is trading at a PE 30% less than the average utility. Sam would be buying. Blessings, Clients and employees of Donaldson Capital own WMT.