Put Wal-Mart And Staples On Your Back-To-School Stock Shopping List

School has begun for kids of all ages in most of the United States, and though we may not all have children of our own, we may want to take a look at some of the favorite back to school stores for reasons other than school supplies. Wal-Mart and Staples are both undervalued stocks currently on our favorites list.

For a diversified list of 24 undervalued stocks I favor, which were provided to attendees of The MoneyShow San Francisco this week, please click here.

Shares of office supply retailer Staples were hit last week after the company reported another quarter of decreased revenue, and a top-line number that was slightly below consensus analyst estimates ($4.75 billion to $4.76 billion). During the three months, SPLS reported adjusted earnings per share of $0.12, which was equal to investor expectations. The firm closed five stores during Q2 and 19 stores year to date in North America as part of a plan to close at least 50 stores during 2016.

“I’d like to thank the entire Staples team for remaining focused and delivering results that were right in-line with our expectations during a quarter that included the launch of a new strategic plan and a change in leadership,” said Shira Goodman, Staples’ interim CEO. “We are dramatically changing our mindset and operating model as we execute our 20/20 strategy and reposition Staples for sustainable long-term sales and earnings growth.”

For Q3, the company expects sales to decrease versus the third quarter of 2015, but EPS should be in the range of $0.32 to $0.35. The earnings guidance excludes potential charges related to the company’s strategic plans, including restructuring and related initiatives as well as the ongoing exploration of strategic alternatives for its European operations. For the full year 2016, Staples expects to generate approximately $600 million of free cash flow excluding the after-tax impact to operating cash flow of approximately $340 million of charges associated with financing for the proposed acquisition of Office Depot and costs associated with the termination of that merger agreement.

While the operating headwinds continue to briskly blow, we believe that Staples will be the survivor of the office supply group and that shares are quite capable of a bounce back in the coming quarters as the firm continues to evolve its businesses and operates more cost efficiently, and looks for an optimal way to monetize its European business. We still like that the company generates solid free cash flow and returns portions of it to shareholders via dividends and repurchases. SPLS shares are currently trading at less than 10 times forward earnings estimates and an attractive price-to-sales and Enterprise-Value-to-EBITDA ratios. SPLS also yields 5.7%.

Discount supermarket and superstore chain Wal-Mart Stores reported a better-than-expected quarter. WMT said that it earned an adjusted $1.07 per share in its fiscal Q2 2017, versus estimates calling for $1.02. Wal-Mart also said that it had sales of $120.9 billion, compared to expectations of $120.3 billion. The company saw its eighth consecutive quarter of positive domestic same store comparative sales as store traffic continued to increase. The firm also enjoyed solid revenue generation within its international business and, on a constant currency basis, its e-commerce sales grew by almost 12% during the period. Finally, Wal-Mart announced that it was purchasing Jet.com as a step in its continued focus to build out its e-commerce and omni-channel presence.

"We're pleased with the positive momentum in our business. Our strategy in the U.S. is working as we delivered an eighth consecutive quarter of positive comps, and international also performed well. We remain focused on building e-commerce capabilities globally and executing our omni-channel plan, as evidenced by our recent alliance with JD.com in China and agreement to acquire Jet.com in the U.S. Walmart is uniquely positioned to provide customers with a seamless shopping experience where we save them time and money,” said CEO Doug McMillon.

Looking ahead, WMT said that it expects adjusted EPS of $0.90 to $1.00 in fiscal Q3 and $4.15 to $4.35 for fiscal year 2017 (which was increased from last quarter’s guidance of $4.00 to $4.30). Year-to-date, the firm has generated free cash flow of more than $10 billion, approximately $5 billion higher than last year at this time, primarily due to better working capital management, including significant inventory improvement and timing of payments.

We are happy to see WMT’s continued progress and its willingness and resolve to evolve and not just allow the likes of Amazon to be the aggressor. We think the firm’s purchase of Jet.com and its ongoing investment in e-commerce, as well as continued investment in its employees, will make a long-term difference in performance, and we continue to like the international segment as well as the differing store concepts to capture additional grocery and urban market business. WMT remains committed to returning capital to holders via buybacks and dividends (the yield is currently 2.7%).

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Opinions expressed are those of John Buckingham, Chief Investment Officer of Al Frank Asset Management, a division of AFAM Capital, Inc. and editor of The Prudent Speculator newsletter.

292-AFAM-8/25/2016