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Tickers in this Article: WMT, TGT, JCP, KR, WFMI
Stock market weakness and tepid domestic growth prospects have sent shares of retailing giant Wal-Mart (NYSE:WMT) back below $50 per share. This represents a compelling value proposition for astute investors.
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The Past Decade
Back at the end of 2000, Wal-Mart's trailing P/E multiple hovered around 40 times. It has steadily declined over the last decade and recently stood at 14.5 times, which, except for a brief spell last year, marks the lowest multiple over this timeframe.

Yet over the past decade, sales have expanded in the high single digits while profits have grown in the double digits. More specifically, the top line has improved approximately 9.5% annually over the past 10 years, operating income has grown 11.2% and earnings 11.9% each year over this period.

A Focus on Capital Generation
A more recent positive development has been a focus on generating free cash flow. Sales are projected to reach an astounding $428 billion during Wal-Mart's current fiscal year but grow only about 5% as the law of large numbers and maturing growth prospects in its core domestic market make sales growth more challenging. A benefit of slowed expansion is less of a need to spend on new store construction and openings. As a result, free cash flow has jumped from $4.5 billion in 2007 to $14 billion last year. This leaves billions to repurchase shares and support a current dividend yield of 2.5%.

Valuation
Conservatively using the average free cash flow generated over the last three years as an input into a discounted cash flow model, shares of Wal-Mart are approximately 20% undervalued. This assumes that the firm can continue growing cash flow 10% annually for the next decade. (To learn more, see Taking Stock Of Discounted Cash Flow.)

Bottom Line
This level of growth is no sure bet, but Wal-Mart continues to prove it can generate capital in its domestic businesses that can be used to buy back shares, support and grow a dividend, and expand overseas.

The share price continues to trend downward currently due to overall stock market malaise and concerns that customers will trade up to more fashion-conscious rivals - such as Target (NYSE:TGT), JC Penney (NYSE:JCP) in the apparel departments, or Kroger (NYSE:KR) and Whole Foods (Nasdaq:WFMI) in the food aisles - once the economy improves. This is a valid concern, but the jury is still out as to if an economic recovery is firmly in place. And finally, few can match Wal-Mart's ruthlessness when it comes to low prices and is something that shoppers will find appealing no matter the economic climate.

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