Wal-Mart de Mexico SAB, Latin America's largest retailer, will defy analysts' "hold" and "sell" recommendations by extending a rally for another year as shoppers buy more, HSBC Holdings said.

Walmex, based in Mexico City, has climbed 6.8 per cent in 2010 even as 10 of 16 analysts who cover the company advise holding the stock and three say to sell it. Three analysts have downgraded the shares this year, according to data compiled by Bloomberg. The company's market value has jumped to 21 times last year's operating profit, double the figure of its closest competitor, Organizacion Soriana SAB.

Walmex is expanding to take advantage of growing consumer demand, said Francisco Chevez, an HSBC analyst in New York whose ratings on Walmex have given clients a 79 per cent return on the stock in the past year, the best among analysts. He projects the stock will climb an additional 13 per cent this year.

Consistent

"This is a company that has produced very consistent growth over years and years," Chevez said in an interview. "I don't see that changing anytime soon."

Walmex has earned the premium over other Latin American retailers because of its history of profit growth, even during last year's recession, Mexico's worst since the 1930s, said Wendy Trevisani, who helps manage $60 billion (Dh220 billion), including Walmex shares, at Thornburg Investment Management.

"You pay up for the best quality company in a region," said Trevisani, whose Santa Fe, New Mexico-based company is Walmex's second biggest outside investor with a stake of 1.2 per cent at the end of 2009, according to data compiled by Bloomberg.

"Walmex is one of the best companies you can buy in Mexico and possibly in all of Latin America," she said.

Antonio Ocaranza, a Walmex spokesman, declined to comment. Wal-Mart Stores based in Bentonville, Arkansas, owns about two-thirds of the Mexican company. Walmex is scheduled to report first quarter results tomorrow.

Walmex reported annual operating profit growth for the 14th consecutive year in 2009. Operating profit excludes interest, taxes, depreciation and amortisation. Analysts expect the company to extend the streak this year, with profit climbing 24 per cent to 33.3 billion pesos (Dh10.03 billion), according to the average of 11 estimates compiled by Bloomberg.

"It's obviously an expensive stock, but it's also a quality stock that delivered very good results in 2009," said Urban Larson, who helps manage $2 billion in emerging markets, including Walmex shares, for F&C Management in London.

"They've gained a lot of new clients, a lot of new customers during the recession," Larson said. "It's definitely more expensive than the peers, but you do get a much better company for that."

Of 11 retailers traded on the Mexican stock exchange, only Grupo Elektra SA, which gets about half of its sales from banking operations, outranks Walmex in the ratio of price to earnings for the past 12 months, with a figure of 28.

Walmex has grown by offering competitive prices, winning market share from Monterrey, Mexico-based Soriana and from family-run, unincorporated businesses that are part of Mexico's "informal" economy, Chevez said. The acquisition in February of Walmart Centroamerica, which had been controlled by Wal-Mart Stores, gives Walmex an opportunity to boost profit further by making operations more efficient in Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica, Chevez said.

Walmex opened 275 stores in Mexico last year for a total of 1,472. The company said in January it plans to open an additional 300 stores in Mexico this year.

Walmex fell 64 centavos on April 9 to 62.72 pesos in Mexico City. This year's rally follows a surge of 59 per cent in 2009, leading some analysts and investors to question whether Walmex's price already reflects its potential. Since the end of 2008, the shares are up 70 per cent, compared with a 51 per cent increase in Mexico's Bolsa index.

"It's not easy to justify much more than the current share price," said David Belaunde, an analyst at Barclays in New York who has a neutral rating on the shares. "It's definitely a stock that is stretched on valuation."

Belaunde said he may reach a more positive view on the stock if Mexican consumer spending and profits from the Central American business improve this year instead of in 2011, as he expects. Mexico's consumer confidence index rose to 81.8 in March from 80.6 in February, still below the figure of 82.1 in January, the national statistics agency said last week.

Banking operations

Some analysts may be underestimating how quickly Walmex can boost profits in the Central American business by improving operations, including joining the unit to its Mexico information system to improve technology, said HSBC's Chevez.

Walmex also may grow through its banking operations and by expanding to other parts of Latin America, he said.

Kathia Reynoso, assistant portfolio manager for about $80 million, including Walmex shares, at Pichardo Asset Management SA in Cuernavaca, Mexico, said some analysts were sceptical there would be gains in Walmex last year. Still, "it was a share that climbed more than the index, surprisingly so."

"This premium that it's always had is justified in its financial results," she said.

The Bolsa (Mexican Stock Exchange) rose 1.7 per cent last week to 33,840.85. Cia Minera Autlan SAB, North America's largest manganese producer, rose 15 per cent as investors bet it would report higher first quarter earnings. Axtel SAB, Mexico's second-biggest fixed-line phone company, rose 11 per cent after Banco Santander SA raised its rating on the company to "buy" from "hold."

Mexico's peso gained 0.9 per cent last week to 12.1870 per US dollar, from 12.3026 on April 2.

The yield on Mexico's 10 per cent peso bond due in 2024 fell 12 basis points last week, or 0.12 percentage point, to 7.81 per cent, according to Banco Santander SA. The bond's price increased 1.18 centavos to 119.01 centavos per peso.