Wal-Mart Stock May Face Resistance at $60

But while Wal-Mart looked dated during the giddy days of housing wealth and easy credit, now its homely stores and everyday low prices are making sense again. The shares are up 23% so far this year, making it among the Dow's best performers, and it's winning props for holding up amid these tough retailing times. With fundamentals better and international business growing, some analysts say Wal-Mart's stock could finally break out again.

Investors, though, may be wondering if this isn't deja vu. In the 1990s, Wal-Mart's stock stumbled for much of that decade, even falling into the single digits for a time, before sprinting way ahead after a turnaround that pushed the shares past $60, adjusted for splits, by the end of 1999. Unfortunately the stock hit another wall and the shares have spent most of the 2000s trapped in a range between the mid-$40s and $60. Now, Wal-Mart is again coming off a late-decade turnaround and the stock is finding new traction. The question is if this run has any legs.

Getting over the $60 threshold won't be easy. Wal-Mart is already trading at a premium to the broader market at 17 times its estimated earnings for the year. Factor in modest future growth, forecast at 12%, and the stock is at a 21% premium to the S&P 500, according to Thomson Financial.

Some premium is warranted since Wal-Mart is generally a safe investment that pays a dividend and has defensive characteristics as a discount retailer of consumer staples.

The feather in Wal-Mart's cap is that while consumers were living it up during the housing bubble, the Bentonville, Ark., company started retrenching.

"They've been on a path for turnaround for several years," says Deutsche Bank analyst Bill Dreher, who has a $65 price target on Wal-Mart shares. "There are at least two major differences between Wal-Mart now and then: Better products, smaller model."

One sign of change is the $1.3 billion in free cash flow Wal-Mart produced in the first quarter. That's a complete turnaround from a free cash flow deficit of $1.3 billion a year ago. A key driver is Wal-Mart's push to keep inventories lean while still growing sales. In the first quarter, inventories were up just 1% but sales grew 10%. This shows Wal-Mart is filling store shelves with products customers want.

That's something considering one of Wal-Mart's bigger recent gaffes was trying to sell trendier clothing. Wal-Mart didn't have the brand power like Target (TGT) to win over higher-income shoppers, and the move did nothing for its core customers who want low prices. Today Wal-Mart hasn't given up on clothing, but the difference is it's selling national brands such as l.e.i. jeans for juniors, which will hit stores ahead of the back-to-school season. It's also stocking the surfer-inspired Op brand, which had its heyday in the 1980s. Junior Op polos go for about $12 on Wal-Mart's web site.

"The company has been executing on initiatives aimed at cleaning up stores and improving merchandising, which in combination with a strong price message to the consumer, positions it well in an environment where the consumer is looking for a superior value proposition," Jefferies analyst Daniel Binder, who has a $63 price target on the stock, said in a note on Wednesday.

With shares near $57, getting the stock into the low $60s would be about a 10% gain. Some Street analysts are more bullish: Citigroup has a $67 price target, ThinkPanmure $68, and Gilford Securities analyst Bernard Sosnick has said the stock in the coming years could top its all-time high of $70, reached in December 1999.

That's pretty bullish, perhaps overly so, but don't discount the business that made discounting profitable. If the housing boom helped people feel wealthier than they were then Wal-Mart's decline during that time could point to its comeback, especially now that consumers are the ones retrenching.

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