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A silver lining to Walmex bribery allegations

FILE -- Workers during their shift at a Wal-Mart store in Mexico City, March, 29, 2012. Recently, Wal-Mart's stock fell almost 5 percent on April 23, as investors reacted to a bribery scandal at the retailer's Mexican subsidiary and a report that an internal investigation was quashed at corporate headquarters in Arkansas.

JOSH HANER/NYT

Wal-Mart's Mexican woes may be offering investors a bargain. The company's Mexico-listed unit, known as Walmex, saw close to $10-billion (U.S.) of market value vanish earlier this week on allegations that executives authorized $24-million in bribes. This looks like an over-reaction.

Mexico's largest retailer has opened an average of 15 stores a month so far this year, most of them bodegas, 400-square-metre shops that make up the bulk of Walmex's growth and account for more than half of its overall sales. Seven or more years ago, when the bribes are alleged to have occurred, opening giant Walmex megastores involved lots of red tape and was therefore sadly payoff-prone. But the greasing of palms is no longer so necessary. Out of the 46 units Walmex opened during the first three months of 2012, only four were large stores.

But even assuming the scandal hits Walmex sales, the math can still look attractive. Before the scandal broke, Barclays reckoned Walmex sales would top $32.8-billion this year. If revenue ends up 10 per cent below that estimate at $29.5-billion while the company's profit margin stays the same, it would make $1.76-billion, or 10 cents per Mexico-traded share, in net income. At Tuesday's closing price of $2.75 per share, that's a forward price-to-earnings ratio of about 28, close to Walmex's historical average and well below the ratio of 34 seen in 2011, according to Barclays. Walmex still trades at a higher multiple than its peers, but Monday's price correction makes the shares more enticing considering they had run up 20 per cent since October.

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Of course, possible violations of the U.S. Foreign Corrupt Practices Act are something Wal-Mart's Arkansas headquarters has to worry about – and the giant parent company suffered its own share price hit on Monday.

But back in Mexico, Walmex has become the country's number-one retailer and a fixture of the economy, employing more than 200,000 people. Felipe Calderon, Mexico's President, has already indicated he isn't interested in investigating the scandal. Violence, such as Sunday's seven killings in 12 hours in Ciudad Juarez, looms larger. With a general election on the horizon, politicians are more worried about reassuring Mexicans they will find a way to stop the bloodshed.

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