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Thursday
May312012

From Wal-Mart To Wall Street: Pricing The Scandal

A reader said:

'It's amazing to me that Wal-Mart stock is at a 12 year high.... I'm not sure what that means, bigger picture, but I'd love to hear some commentary.'

The stock market is a mysterious place. But here's our best guess.

The New York Times broke the story about Wal-Mart's alleged bribery in Mexico on a Saturday (April 21). The day before, Wal-Mart shares had  closed on the NYSE at $62.45. Over the next few trading days, the share price dropped to $57.36, reducing Wal-Mart's market cap by about $18 billion.

Wal-Mart is one of the world's best known brands. Bribery and cover-up allegations against such a familiar name were shocking. News coverage was initially intense, and commentary about potential consequences was dire -- and often way over cooked. Little of the early reporting about FCPA enforcement was nuanced. Uncertainty about Wal-Mart's future ruled. 

But it didn't take long for thoughtful journalists to bring some perspective and balance. When that happened, the panic drained from the market, replaced by relief ('fear and greed'). Even in a worst-case scenario, investors realized, Wal-Mart's overall losses for any proven violations of the FCPA wouldn't approach $18 billion, the amount investors had lopped off the company's market value.

The share price gradually rose over the next couple of weeks. By May 15, when it closed at $59.35, it had recovered 40% from the drop caused by the scandal.

What happened next was pure Wall Street. The City Wire explained it this way:

On May 17, Wal-Mart reported solid numbers for the first quarter of its fiscal year 2013, with net income up more than 9%, and U.S. same store sales up 2.6%. The per share earnings of $1.09 were ahead of the 98 cents in the same quarter of last year, and above Wall Street estimates.

Any concerns the investor community may have had about the Mexico bribery issue were overcome by the earnings report.

On May 17, Wal-Mart jumped to $61.25. It's been rising since then. Yesterday (May 30), the shares closed at $65.44, about 14% above the low following the NYT bribery story.

'[I]ntraday trading on Wednesday,' the City Wire said, 'reached $65.95, ahead of the 52-week high of $65.76.'

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