Wal-Mart Stores, Inc.: WMT Stock Is Cheap for a Reason

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Wal-Mart Stores, Inc.’s (WMT) stock price is up nearly 6% since the start of 2016. So against a down market — the S&P 500 is off 10% so far this year — it would seem like Walmart stock is doing just fine.

Walmart stock logoSure, the short-term outperformance is nice, but Walmart remains caught in a longer-term downtrend in which shares still are off 27% since early January 2015.

No, despite the nice pop to start 2016, Walmart stock is broken. And  many catalysts that were supposed to boost Wal-Mart’s stock higher have failed to materialize.

And both current and would-be WMT investors shouldn’t count on those catalysts triggering anytime soon.

The Multibillion-Dollar Catalyst That Never Was

During Walmart’s fiscal Q3 2015 earnings conference call, Greg Foran, President and CEO of Walmart U.S., said, “Gas prices are considerably lower this year than a year ago, which may give customers a little more discretionary spending power in the coming months.”

The correlation seemed obvious. Consumers, particularly those earning lower incomes, may be tempted to spend a few extra bucks of savings on goods, especially at Walmart stores. Ironically, on the same day as Walmart’s earnings report, The New York Times suggested that since consumers were paying less than $3 a gallon at the pump, the economy could receive a “multibillion-dollar boost.”

Walmart’s stock price neared $90 per share, ending 2014 on strong optimism that the largest retailer would become a large beneficiary of this multibillion-dollar boost.

During Walmart’s subsequent earnings conference call in February 2015,, the same sentiment was reiterated.

“Now clearly, our sales benefited from customers having more spending power due to lower gas prices in most of our large markets,” Walmart President and CEO Doug McMillon said.

However, management’s tone began shifting somewhat a few months later during Walmart’s Walmart’s fiscal Q1 2016 earnings conference call on May 19, 2015.

Said McMillon: “We know that many of our U.S. customers are using their tax refunds and the extra money from lower gas prices to pay down debt or put it into savings. They’re also using these funds for everyday expenses like utilities and groceries. That’s where we can be their destination of choice. We’re not where we want to be in every store, but I’m pleased with the progress that I’m seeing.”

At this point, Walmart stockholders began realizing that this sudden influx of business wasn’t quite what it was made out to be.

WMT investors also began to take a closer look at the retailing giant and questioned whether the company was the best choice moving forward.

WMT Admits to Trouble Ahead

Walmart investors were dealt a difficult pill to swallow when the company presented its game plan for 2016 and beyond during its analyst day conference on April 1, 2015.

Walmart, citing “heavy investment mode,” said it expects full-year fiscal 2017 earnings to fall 6% to 12%, then a return to profit growth in FY 2018.

Granted, Walmart’s management will heavily invest in its business, especially in omni-channel initiatives. However, WMT failed to convince Wall Street, which in term failed to convince investors that Walmart stock represents an attractive investment.

“While we heard many reasonable goals, they were mostly tactical in nature, blocking and tackling type fixes that could apply to many retailer,” Morgan Stanley retail analyst Simeon Gutman wrote following management’s presentation. “The evolving and increasingly dynamic competitive environment (with omni-channel being front and center) seems to demand an even higher level of sophistication, in our view.”

Avoid Walmart Stock

Walmart announced in January 2016 that it will shut down 102 of its smallest-format stores, Walmart Express.

Similar to point No. 1 above, Walmart Express stores were expected to boost Walmart stock by going head-to-head against dollar store chains like Dollar General Corp. (DG) and Dollar Tree, Inc. (DLTR) in areas that couldn’t support a full-sized Supercenter.

It is difficult to knock a company that has taken a bold initiative only to ax a pilot project that hasn’t lived up to its hype. However, Walmart’s executives are guilty of teasing investors with promising results they didn’t achieve.

“Walmart Express Stores continued to deliver solid results,” Jeff Davis, Walmart’s EVP and treasurer, said during a Q3 2014 earnings conference call. “We continue to refine this format, and we are encouraged about the role they can play in the future as we look to fill in and expand our presence in core markets.”

Walmart stock has little going for it, and the company’s management team is scrambling to come up with a game plan to deliver growth over the coming years after scrapping prior initiatives.

Until something encouraging is announced, investors would be well-advised to stay away from WMT.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2016/02/walmart-stock-is-cheap-wmt/.

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