Wal-Mart Bribes Won’t Crack Top-Ten List: $10 Billion Market Cap Drop Makes Little Sense
Wal-Mart (WMT) caught itself a mess last month when the New York Times (NYT) ran a front-page story alleging a vast bribery scandal at Wal-Mart de Mexico: cash delivered to government officials; a hush-up by top Wal-Mart executives.
The story inspired outrage, and hundreds of online comments. A typical one: “I won't shop at Wal-Mart . . . another prime example of the rot that is at the un-checked heart of American business.” The California Teachers’ pension fund filed a derivative suit. And the Democratic National Committeemen announced they’d return $50,000 in Wal-Mart gift cards.
Little wonder, then, that since the New York Times story broke April 21, Wal-Mart’s shares are off 5%, trimming $10 billion or so of market cap.
But guess what: most Wal-Mart shoppers don’t read the New York Times. And, the guessing here is, neither do they care about bribery in Mexico. And, conversely, New York Times readers probably don’t shop much at Wal-Mart, and neither do pension fund trustees or political party chiefs. Is this a scandal largely detached from business implications?
Oh, but you say, the feds are after Wal-Mart now and it could be forced to cough up gazillions in fines and other penalties. Actually, unless the government completely departs from historical practice, the Wal-Mart punishment won’t begin to approach the drop in market cap.
When companies bribe foreign officials, the feds crack down using the Carter-era Foreign Corrupt Practices Act. Here are the top 10 enforcement actions via the FCPA Blog:
1. Siemens (SI) - $800 million
3. BAE - $400 million
4. Snamprogetti Netherlands B.V./ENI S.p.A. - $365 million
5. Technip S.A. – $338 million
6. JGC Corporation - $218.8 million
7. Daimler AG - $185 million
8. Alcatel-Lucent (ALU) - $137 million
9. Magyar Telekom/Deutsche Telekom - $95 million
10. Panalpina - $81.8 million
To put Wal-Mart’s story in perspective, it’s accused of paying $24 million in bribes, and in that it seems Wal-Mart again lives up to its reputation for being a skinflint. Siemens, the German manufacturer and reigning king in the bribery scandal department, was accused of paying hundreds of millions of dollars (the Department of Justice press release from the time says $805.5 million) in bribes all over the world. This massive scandal involved Swiss bank accounts and Iraq’s oil for food program. And for all this, it paid $800 million in the U.S., plus another $550 million in Germany, $336 million in Greece and spent about $1 billion for an investigation. That comes to $2.7 billion.
Yet investors seem to think the bribery scandal will cost Wal-Mart roughly four times as much?
And here’s how Siemens has done:
The real question is how Wal-Mart is doing other than the bribery scandal. According to the 10-K filed in March, those discounts don’t produce much profit margin.
Despite the hubbub in Mexico, the U.S. still represents 72% of Wal-Mart’s sales. A good metric to zero in on is same-store sales, or what Wal-Mart calls “comparable sales.” Last year chief executive Michael Duke made this a big priority, saying he was “simply not satisfied with the net sales results in Wal-Mart U.S.” At the same time, he said his top goal was to work with the chief of Wal-Mart U.S. “to achieve positive comparable store sales.” They barely succeeded. After two years of same-store losses, the figures were up all of 1.6% in the last fiscal year, which ended Jan. 31. Excluding Sam’s Club, same-store sales were up just 0.3%.
So Wal-Mart shares are on sale right now, and pay a 2.7% dividend yield. Financially well-managed, Wal-Mart sales rise slowly, low costs help net income to rise somewhat faster, and stock buybacks mean EPS rises still faster.
But remember that sometimes the bargain bin is full of stuff you just don’t need.
Filed under: Company Analysis