Wal-Mart’s Germany Sale Good, But Not Good Enough

From Forbes:

Wal-Mart Stores’ announcement last week that it is selling its German businesses is a positive, but not enough for investors to become more optimistic on the stock, according to a recent Morgan Stanley report.

On Friday, Wal-Mart announced that it is selling its 85 German stores to rival Metro AG, Germany’s leading retail chain, after trying to penetrate that market for nine years. .

Wal-Mart’s foray into Germany will ultimately cost $2.5 billion, according to Morgan Stanley. But Wal-Mart will receive only $250 million from its sale to Metro.

Despite the loss, which includes a $1 billion exit charge worth 24 cents per share, Wal-Mart’s 2006 earnings goals may be easier to reach after shedding its underperforming assets in Germany, said Morgan Stanley.

Wal-Mart could save about $100 million in taxes due to the write-down and improve its margins from cash paid during the deal.

That, along with the elimination of one of its weakest international divisions, is good for Wal-Mart, according to Morgan Stanley.

“We think the shedding of the businesses is positive, especially when combined with the sale of [Wal-Mart’s] operations announced earlier this year,” said Gregory Melich, an analyst at the research firm.

“The message is clear: International investment is not just a one-way street; if it doesn’t work, management is increasingly willing to back away,” the analyst said.

Morgan Stanley reiterated an “equal weight” on Wal-Mart, citing stiff competition from Target, too-high expectations for the second half of the year and an expensive 2006 capital expenditure budget continue to weigh on Wal-Mart shares.

Posted by Vasudha Desikan on Wednesday, February 21, 2007

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