Walmart Earnings Show WMT Stock Is No Bargain

Walmart (WMT) earnings have WMT stock sitting at a three-year low, and after the latest quarterly report, investors will be lucky if WMT can trade sideways from here.

Walmart WMT stockAfter all, WMT has no shortage of serious problems. On the big stage, the macroeconomic forces weighing on WMT show no signs of abating. There’s nothing on the horizon to whack the dollar.

And although the company rightly raised wages for employees, the added costs are pressuring the bottom line. Indeed, higher-expected labor costs are one of the reasons WMT cut its full-year outlook.

In other woes, WMT is struggling with international expansion. Oh, and increased competition from dollar stores and online rivals is taking a toll.

As if all that weren’t enough, Walmart earnings revealed a surprisingly high hit from shrinkage, which is what retailers call theft of goods by customers and employees.

Add it all together, and we can expect more disappointing news when Walmart releases earnings for at least another two quarters. Higher wages, theft and other forms of loss, and lower pharmacy reimbursements are going to hurt profits for the rest of the year. As WMT U.S. president Greg Foran said in unusually frank remarks:

“I want to be straightforward: These issues will present continuing profit challenges for the remainder of the year. We are certainly disappointed. But we are not standing still. We know we can do better, and we will.”

WMT Stock Is No Bargain

It must do better, and soon. The market hates few things more than a miss-and-cut quarter, and that’s exactly what Walmart earnings served.

Walmart earnings fell to $1.08 per share, which was well below the Wall Street forecast of $1.12, according to a survey by Thomson Reuters. Revenue and same-store sales did manage to exceed estimates, but that did nothing to keep WMT from taking a hatchet to guidance.

WMT is now targeting current-quarter EPS of 93 cents to $1.05, vs. a Street estimate of $1.08. For the full year, the world’s largest retailer sees EPS at $4.40 to $4.70 per share, down from $4.70 to $5.05.

An outlook like that ensures that this dog of a stock has more drooling to do. WMT stock is down about 19% for the year-to-date — and counting — and it’s still not sufficiently cheap to warrant buying on valuation.

True, the stock goes for about 14 times forward earnings, which is significantly cheaper than the S&P 500. However, that’s still a bit above its own five-year average, according to data from Thomson Reuters Stock Reports. A multiple usually needs to be materially below its own long-term average to make a stock look like a bargain.

Besides, the market won’t pay up for WMT stock as long as the outlook is so troubling.  The company is covered in macro problems beyond its control — the dollar, sluggish retail spending — as well as company-specific issues like costs and competition.

Issues like this are not very reassuring, and sentiment tends to be sticky, especially when it’s sour.

Sure, you could buy WMT now betting that it’s a long-term value play, but how long do you wait for upside before concluding that it’s really just a value trap?

There’s just no visibility on when things could get better. When it comes to WMT stock, don’t buy the dip.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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