Wal-Mart Stores, Inc. (WMT) has long been the biggest bully on the retail block, which is why more than a few people have enjoyed the recent fall of Walmart stock.
But rumors of the nation’s largest retailer’s demise were greatly exaggerated.
Don’t look now, but WMT stock is in the midst of a four-month rally, having risen from $56 to $68 since hitting rock bottom on Nov. 13.
Better yet, WMT remains fairly valued, trading at less than 15 times earnings. Furthermore, the dividend hasn’t gone anywhere, having expanded every year for the past four decades and with a current yield of 3%.
WMT Battling Declining Sales, Image Problem
That doesn’t mean there aren’t legitimate concerns about Walmart. After all, Amazon.com, Inc. (AMZN) did pass it last year as the world’s largest retailer by market value — the latest sign that e-commerce is rendering big box stores increasingly less relevant.
The erosion in Walmart’s sales accelerated last year. Revenues were down slightly in 2015, the first time that’s happened in more than a decade at WMT, while net income declined more than 10%.
The company expects more of the same this year, forecasting a 6% to 12% decline in earnings per share, on flat sales, in 2016. An ongoing share repurchase program has helped make the per-share earnings decline look a bit more respectable, but not enough to achieve positive EPS growth.
Unlike Amazon, however, Walmart is consistently profitable; it earned $4.57 per share in the past 12 months. So declining earnings aren’t necessarily a death sentence, especially at a time when many U.S. retailers are struggling.
The downturn in Walmart stock is more about image. To investors, Walmart represents the dying big-box store; Amazon represents the shift to buying everything from your couch with a few clicks of a mouse. Even if Walmart’s sales are still nearly 25 times Amazon’s, the Wall Street (and, to a certain degree, Main Street) narrative is that WMT is the past, while AMZN is the future. And people invest in the future, not the past.
So that’s the bad news.
The good news for Walmart and Walmart stock is that it is that is still far and away the dominant retailer — brick and mortar or online — by sales in the world, with $482 billion in 2015 revenue. That’s more than Amazon, Costco Wholesale Corporation (COST), Target Corporation (TGT) and Home Depot Inc (HD) combined. Roughly 100 million people shop at a Walmart every week, and it’s the largest single employer in 19 states!
Furthermore, Walmart’s biggest problem is fixable. The company has stubbornly refused to expand its online presence the way many of its larger brick-and-mortar competitors have; just 3% of total revenue come from online sales.
Eventually, the company (you would think) will wise up to the fact that times are changing, and it can no longer rely so heavily on in-store purchases. Walmart’s monster physical presence, combined with a more substantial digital alternative, could help restore growth — or, perhaps more importantly, show investors that it’s willing to change with the times.
Walmart Stock a Long-Term Bargain
In the meantime, Walmart stock is starting to pick up some real momentum, trading above its 50- and 200-day moving averages for the first time in more than a year. The rebound in the broad market has surely helped. But the biggest reason for the bounce-back in WMT is that it had become vastly oversold — Oct. 14 was the largest single-day decline in WMT stock in decades!
Walmart has a lot of work to do to restore investors’ faith, and certainly 2016 will be an uphill battle. But years from now, WMT will still be the dominant player in the retail landscape, and perhaps it will look a lot more modern than it does right now.
Thus, I think if you buy Walmart stock at these depressed prices and hold onto it for a few years, you’ll be quite happy with the result.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
