It has been a rough year for Wal-Mart Stores, Inc. (WMT) stock, down more than 20% over the last year.
Given that just about every indicator for increased consumer spending is bullish, coupled with the losses in Walmart stock, it is clear that now is a great time to own a piece of this iconic company.
Sad but True
Last year Walmart announced plans to invest $2.7 billion in its own employees. This plan would affect 1.2 million Walmart U.S. and Sam’s Club associates, boosting the hourly rate to an average of $10.58 for part-time workers and more than $13.30 for full-time.
Given that Walmart is the country’s largest employer, this move seemed good for both consumer spending and the morale of employees. It also serves as a reminder of good business ethics.
Unfortunately, Wall Street does not see this move in such a positive light. Instead, investors see a $2.7 billion increase to cost that will weigh on its EPS to the tune of 12% without any noticeable increase in production.
While this assumption is somewhat true, it is hard to put a dollar value on improved customer service, a happier workforce, lower training costs that stem from less employee turnover, etc. In other words, there are long-term effects of the $2.7 billion investment that investors have seemingly not realized.
Then, you input other factors like lower gas prices, increased consumer spending and rapid e-commerce growth as catalysts and you arrive at a formula for value in Walmart stock.
Value in WMT
Currently, WMT stock is trading at a huge discount to its 52-week high, at $66 versus $86.30. WMT is also trading at a very attractive multiple to cash flow of 8.5 and just 14 times earnings.
And last but not least, Walmart pays investors a dividend yield of nearly 3% annually to hold its stock. Therefore, Walmart is sharing the wealth with both employees and investors.
With that said, it’s not all rainbows and unicorns surrounding Walmart right now. The company will report fourth-quarter earnings this week, and it is expected to produce its first year-over-year revenue decline in more than two decades. This is a company that has thrived in even the most devastating of market conditions, like the recession in 2009, and has always produced year-over-year growth.
With that said, there are a lot of changes at Walmart. Not only is currency exchange a major drag on revenue, but the continued market share gains of Amazon.com, Inc. (AMZN) and The Kroger Co (KR) in retail grocery remain woeful for WMT.
Furthermore, Walmart is consolidating and closing down many of its unprofitable and underperforming stores while also adding smaller stores that are filled with its best-selling products. This transition takes time and comes at the cost of growth, but when coupled with rapid e-commerce growth, these are moves that should benefit WMT stock long-term.
Bottom Line for Walmart
In retrospect, WMT is misunderstood. It is a very strong, stable company that will prove lucrative for investors who buy at today’s beaten-down prices.
While it is very possible that Walmart stock will face more pressure after announcing its first year-over-year decline in revenue, investors must remember to see past the now and look into the future … a future that looks bright for Walmart stock.
As of this writing, Brian Nichols owns AMZN stock, and may initiate a long position in WMT over the next 72 hours.
