Wal-Mart Is Helping U.S. Manufacturers By Helping Itself

By Jonathan Berr | October 09, 2013 AAA

Wal-Mart Stores (NYSE:WMT), the world’s largest retailer, is one of a growing number of Fortune 500 companies that’s found it pays to buy American.

The Bentonville, Ark. company, whose pursuit of low prices has been blamed for the decimation of the U.S. manufacturing base, now seems just as passionate about buying goods made in its home country. It has pledged to spend $50 billion more on buying American over the next decade.

Though Reuters notes that the pledge isn’t particularly onerous for a company with annual sales topping $466 billion, it will certainly be a big deal for those companies that do business with Wal-Mart. Oftentimes, the retailer becomes the sole customer for these small manufacturers.

“It reinforces our belief that we can revitalize American manufacturing and help rebuild the middle class with good-paying jobs that will allow employees to be a part of the American dream again,” said Bill Simon, president and chief executive for Walmart USA, in a recent press release.

If this limited effort proves to be successful, Wal-Mart will no doubt expand it given the public relations value. Also, some consumers are growing increasingly leery about the country’s dependence on Chinese manufacturing. According to a recent UN report, about 70% of all counterfeit goods seized worldwide originate in China.

Wal-Mart’s interest in supporting American business may be tied to its plans to expand its grocery business, which has languished because the chain has had difficulty keeping fresh fruits and vegetables on its shelves. The company also is trying to buttress its reputation with shoppers. Wal-Mart finished at the bottom of retailers in the American Consumer Satisfaction Index, a distinction it has held for years. Wal-Mart’s score of 71 lags many smaller and struggling rivals such as Sears (Nasdaq:SHLD), which scored 75, and grocery chain Safeway (NYSE:SWY) (75). Best Buy (NYSE:BBY), which is in the midst of a turnaround, earned a 78 rating, while Target (NYSE:TGT), Wal-Mart’s biggest rival, received an 81.

If Wal-Mart can buy more American goods and maintain its competitive advantage that would be a huge plus in the eyes of Wall Street, which has been concerned for a while about Wal-Mart’s growth prospects. The company’s sales in the U.S. were below its own internal expectations during the most recent quarter. In the 13 weeks ended July 30, same store sales, a key retail metric measuring performance of stores opened at least a year, fell 0.3% when gasoline is excluded.

The company is late to the “Buy America” cause. Reuters noted that many Wal-Mart suppliers had already decided to produce more goods in the U.S. That dovetails with a recent survey by the Boston Consulting Group which found that the majority of manufacturers with sales of more than $1 billion are either moving production back to the U.S. or are actively considering it. The reason why is simple: Wages are rising in China, eroding the competitive advantage that the world’s most populous country has enjoyed over the rest of the world. People in China are also increasingly worried about corruption and inequality, according to the Pew Research Center. The ruling Communist party would rather have higher wages than widespread social unrest.

Bottom Line

Wal-Mart may being doing the “right thing” for the American economy by increasing purchases of U.S.-made goods, but more importantly it’s doing the right thing for its shareholders over the long run.

With a price-to-earnings ratio topping 14, Wal-Mart shares are attractively valued. Shares of the company have risen about 7% this year, underperforming Family Dollar (NYSE:FDO), which increased about 29%. Analysts have an average 52-week price target of $81.73, about 12% above where the stock recently traded. The time to buy Wal-Mart’s stock is now.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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