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Wal-Mart de México: Looks Undervalued And Set To Build On A Winning Hand

Wal-Mart de México: Looks Undervalued And Set To Build On A Winning Hand

Wal-Mart de Mexico (Walmex), the leading Mexican retailer, is poised to continue its success despite normalization of same-store sales comps in Mexico. The company’s ongoing investments in price, assortment, eCommerce operations, and ancillary services are expected to drive growth and solidify its position in the market.

Trading at approximately 15% to 20% below fair value and sell-side price targets, Walmex appears undervalued. While inflation and potential election cycle turbulence may present challenges, the company is well-prepared to weather these headwinds. Additionally, Walmex stands to benefit from Mexico’s expanding economy and opportunities in nearshoring and export growth.

A Quick Look Back

Walmex’s second-quarter results were impressive, with significant revenue and same-store sales growth. Despite a slight decline in gross margin, the company experienced a rise in EBITDA and performed well across its store concepts. There were no fundamental issues observed during this period.

Near-Term Challenges and Opportunities

Mexico’s Economy – Uncertainty Now, But Better Days Ahead

Mexico’s retail sector is experiencing a slowdown in sales growth, primarily driven by customer budget constraints and inflation. However, Walmex’s strategic pricing initiatives and widespread store presence help mitigate these challenges, giving the company a competitive edge over rivals like Soriana.

While uncertainties loom due to the upcoming Mexican presidential election, Walmex’s focus on essentials and low-cost retailing should help the company navigate potential economic fluctuations. Moreover, the long-term economic prospects of Mexico, driven by nearshoring and infrastructure investments, present growth opportunities for Walmex.

Multiple Growth Drivers Worth Watching

Walmex has several company-specific growth catalysts. These include increasing the share of private label goods, expanding store footprints, and leveraging eCommerce opportunities. The company’s On-Demand service has received a strong response and demonstrates the potential for growth in online retail. Walmex is also diversifying its offerings through complementary services like advertising, financial services, and prepaid phone and connectivity businesses.

The Outlook

While store expansion opportunities may be limited, Walmex can sustain growth through value-added services like eCommerce and new service initiatives. The company is expected to achieve long-term annualized growth of over 8%. Profitability is also anticipated to improve, driven by margin expansion and incremental revenue from value-added services. Discounted cash flow analysis indicates that Walmex is undervalued by approximately 20%.

The Bottom Line

Despite conservative estimates, Walmex appears undervalued and is positioned to strengthen its market dominance. Leveraging its merchandising, logistical, and pricing advantages, the company is well-positioned to drive revenue, profits, and market share. Investors should note that Walmex is not listed on a major U.S. exchange and should consider the associated risks.