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Should I Buy Walmart? 3 Pros, 3 Cons

A fair valuation isn't a good cover-up for WMT's lingering issues

   

When Walmart (WMT) reported its first-quarter results a few weeks back, there wasn’t much for investors to be excited about. The company’s earnings increased 4.6% to $1.14 per share to top Street estimates by just a penny, while revenues that inched up by 1% to $114.2 billion came in below expectations for $116.3 billion.

On the conference call, WMT’s senior managers gave a plethora of excuses for the miss. Unusual cold weather, delays in tax refund checks and the elimination of the payroll tax holiday were some of the more prominent ones.

WMT still is a winner in 2013 with 10% year-to-date gains and has almost doubled the broader market’s performance in the past two years, returning 40%. However, things have been mostly downhill since that earnings report.

So should you buy Walmart while investors are showing a little fear, or is the big-box’s multiyear run about to take a long nap? To see, let’s look at the stock’s pros and cons:

Pros

Innovation: Walmart has a laser-like focus on finding efficiencies, and has invested large amounts into in-store innovations. One of its more successful developments is “Scan & Go,” which is an Apple (AAPL) iPhone app that allows customers to scan price tags, then make the transactions at a self-service checkout. The technology still is in its early stages and is available in only about 200 of Walmart’s roughly 9,000 locations, but the results have been promising, and it already is planning to launch a Google (GOOG) Android app, as well.

E-Commerce: Over the past few years, WMT has invested heavily in this segment to push back operators like Amazon (AMZN) and eBay (EBAY), but also to gain ground in foreign markets. In Brazil, WMT has the country’s most trafficked e-commerce site. Walmart also recently purchased Yihaodian, a top player in China with a tremendous platform offering same-day delivery to Shanghai, Beijing, and Guangzhou. In Q1, WMT’s overall e-commerce business grew by about 30%, though the company did not provide details on the amount.

Financials: Walmart is sporting a smart 17.8% return on investment in the past 12 months. WMT has produced about $22 billion in operating cash flow in that time. Walmart also continues to show generosity toward its shareholders, returning $1.6 billion in dividends (WMT currently yields 2.5%) and $2.2 billion in share repurchases in Q1 alone.

Cons

International Business: WMT has an impressive footprint, with a presence in countries like Brazil, China and even parts of Africa. But the overall business has been sluggish, with sales up only 2.9% to $33 billion in Q1. And the company’s struggles are more than just a sales problem — WMT has also had issues with its costs. In Walmart’s defense, it can be tough to deal with sourcing, wages and regulations in global markets, and WMT is taking actions to improve the situation. But it looks like it will take some time before investors see results.

Politics: Because of WMT’s size, it often is the target of government backlash. For example, the company uses 279 factories in Bangladesh, a country that has oppressive labor conditions. Recently, a building collapsed there, killing more than 1,000 employees; as a result, Bangladesh is now looking at revamping its regulations. Another big issue for WMT is an extensive bribery probe involving operations in Mexico. Litigation costs came to $73 million in Q1 — well above the forecast of $40 million to $45 million. And WMT expects to spend another $65 million to $70 million in the next quarter.

Competition: The big players pressuring WMT include brick-and-mortar outfits Target (TGT) and Costco (COST), as well as online operators such as Amazon. Another competitive threat: dollar stores. Companies like Dollar General (DG), Dollar Tree (DLTR) and Family Dollar (FDO) have been able to build their low-cost brands, often at Walmart’s expense. So far, WMT’s response to these businesses has been feeble.

Verdict

Sure, maybe the latest quarter was a fluke, but that doesn’t change the fact that WMT faces serious competition and cost issues in international markets. Not to mention, it’s hard to find places to grow your business when you already generate $470 billion in annual sales.

WMT’s valuation is fairly reasonable, coming to about 16 times trailing 12-month earnings, but it’s far from enough reason to buy the stock amid a dearth of growth catalysts.

So should you buy Walmart? No — for now, the cons outweigh the pros.

Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO StrategiesAll About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2013/06/should-i-buy-walmart-3-pros-3-cons/.

©2014 InvestorPlace Media, LLC

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