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Daily Views – January 25, 2008

Company Tags: Wal-Mart de Mexico (WMMVF.PK); LTD, M, AAPL, NWS, MGM

9 pm ET…January 24, 2008 — Comment on Markets, Companies & Events in the News

South of the Border

Tonight we go south of the border…from Wal-Mart (WMT: $22.22, Mkt Value: $195 B) in the USA to Mexico City, Mexico. Wal-Mart de Mexico (WMMVF.PK: $3.50; MV: $29 B) represents Wal-Mart’s first international operation, a 50% joint venture with Cifra S.A in 1992. In 2000, Cifra officially changed its name to Wal-Mart de Mexico. Here’s a link to its December news: http://www.pinksheets.com/otciq/ajax/showFinancialReportById?id=13402

Other retailers, like Limited (LTD: $17.15; MV: $6 B) and Macy’s (M: $25.02; MV: $10 B) reported disappointing December sales, both down 8%; WMT itself was up 2%. Wal-Mart-Mexico had an increase in December sales of 8%, one of the highest in the industry. If one is timid about investing in non-USA stocks, then consider Wal-Mart de Mexico. It has a market value almost twice the market values of Limited and Macy’s combined…and its stock sells for $3.50.

Here’s how Wal-Mart Mexico’s stock performed since October, relative to Wal-Mart USA and the Dow Jones Average, of which WMT is a member.

Our research unsurfaced some interesting developments about Wal-Mart Mexico’s short position: The number of shares sold short increased to 19.8 million shares at the end of December from 4.4 million shares sold short as recently as the middle of December. The stock price during the last half of December ranged between $3.70 and $3.30 (see graph below). Hence, at an average short sale price of $3.50 per share — about where the stock trades now — this 15 million share increment equals an investment point of view of about $54 million.

Given that a bleak outlook for December retail sales began to emerge right after Thanksgiving, this position was probably viewed as a cheap and out-of-the-way means to play the expected downside in stock prices for retailers…however, “Wal-Mex” didn’t collapse. Upon further inspection, we noticed this wasn’t the first time there was a spike in the short interest.

In mid-October, Wal-Mex shot up to almost $4.30 from the end of September…and sure enough, the number of shares sold short shot up to 11.2 million shares. Then, by the end of November, back to the 4 million shares sold level. Based on an average sales price of $4 share at the time, we calculate that the engineer behind this position pulled out at least $25 million.

The only estimates in the public domain look for Wal-Mex to grow at 12% per annum. Our own research says that right now, “Wal-Mex” is valued at 1.5 time annual sales: $30 billion market value versus $ 20 billion in annual sales. As a rough barometer, if Wal-Mart USA is valued at 3 times annual sales, even valuing Wal-Mex at 2 times annual sales yields an arithmetic stock price of $5.35 per share.

Here’s the math — two times $ 23 billion in fiscal ’09 sales for Wal-Mex = $ 46 billion, divided by 8.6 billion Wal-Mex shares issued = $5.35 per share. Research points out that the all-time high for Wal-Mex is almost $6 per share. Hence, this is probably a defensible objective. But that’s just an opinion.

SNIPPETS —

• How fleeting is Wall Street’s love? Apple Computer (AAPL: $130: MV: $114 B) hit an intraday high of $202.96 per share less than 30 days ago. By the end of January, Apple will have lost over $60 billion in Market Value…! That was the day Apple announced a deal with News Corp (NWS: $19.25; MV: $11 B)
• AMERICA On-Sale — Dubai World, the government-owned, “sovereign” fund, purchased 5,000,000 shares of MGMMirage (MGM: $70.80; MV: $21 B) for $84.50 per share. This gives Dubai a total of 19.5 million shares in MGM, or 6.5%. This latest capital injection equals $423 million. But that’s not the whole story. In addition, Dubai World will invest $2.7 billion in MGM’s CityCenter real estate development on the Vegas strip. Total investment: $4.1 Billion.

Let us hear your thougths below:

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