Wal-Mart Stores, Inc. (WMT) Stock Is a Long-Term Risk With BIG Upside

Although most stocks have mustered big gains since Trump was elected President in early November, a handful of names have largely been left out of the rally. Wal-Mart Stores, Inc. (NYSE:WMT) is one of those laggards. Since Nov. 9, the S&P 500 has advanced an impressive 5.8%, while Walmart stock is down just a bit, and testing the waters of lower lows.

Wal-Mart Stores, Inc. (WMT) Stock Is a Long-Term Risk With BIG Upside

The culprit for the weakness from WMT stock (while everything else did well) is mostly rooted in concerns that Trump’s campaign promise to impose sizeable tariffs on foreign-made goods imported into the United States … Chinese-made goods in particular.

Such a move would hit Walmart right in the proverbial breadbasket, since it relies on inexpensive imported goods to provide low prices for its patrons.

What if, however, the potential impact of a tariff war wasn’t likely to make as big of an impact on the per-share profitability of WMT stock as many have said it might?

As it turns out, the worst of the concerns may be considerably overblown.

WMT Stock: Higher Tariffs Loom

The quick philosophy: If it costs more for Walmart to buy goods from overseas suppliers, the retailer will either pass those higher costs along to its shoppers, or be forced to simply “eat” the difference (or a combination of both). The former will crimp sales, as shoppers look elsewhere or do without those goods. The latter crimps net profit margins. Neither bodes well for the future value of Walmart stock.

The precise size of any new tariff — if imposed — hasn’t been decided yet. At one point Trump had mentioned a tariff as high as 45% on any Chinese-made imports, though now with Peter Navarro tapped to head-up the National Trade Council and plans starting to solidify, the more plausible tariff on imports from China is apt to roll in somewhere between 5% and 10%.

Those are more palatable numbers than the previously suggested 45% tariff, though it remains to be seen who exactly will shoulder the burden of the added costs; consumers don’t always respond as expected.

Either way, even to the extent a new White House administration can impose tariffs on any and all imports from China, most critics and pessimists are overestimating the potential impact such a move may have on WMT stock. Conversely, they may be underestimating the headwind that may be created by a more global tariff.

Fortunately, it may all be mostly irrelevant.

Breaking Down the Numbers for Walmart Stock

Although the debate over the potential fallout of new tariffs has been vigorous, little of that discussion has clarified that the looming tariffs would be imposed at the wholesale level rather than based on retail prices, and would only apply to foreign-made goods … and the difference is significant.

While the exact figure isn’t known, experts believe WMT imported roughly $50 billion worth of Chinese goods in 2013. It’s unlikely that figure has changed much in the meantime. That’s not chump-change, but for perspective, over the course of the last twelve months, Walmart has driven company-wide sales of $484.6 billion. During that time, it spent a total of $360.5 billion to purchase the merchandise it sells.

That’s right — only about 14% of the amount of money spent by WMT on its inventory comes from China. If that portion of its costs rises by a full 10%, then Walmart stock’s total cost of goods sold will rise by only 1.4%. That’s manageable. It’s perhaps even negligible.

As they say though, there’s more to the story.

If Trump’s import tariffs start and end with China, Walmart can blow it off. If instead the President-elect tacks on even a mere 5% tariff on any imports coming into the United States, a huge chunk of its inventory could become considerably more expensive.

The specifics: Right now, two-thirds of its inventory in its U.S. stores — the bulk of its business — is made, sourced or grown domestically. The numbers aren’t perfectly clear, but the costs on the non-U.S.-made portion of its inventory subject to a new tariff of only 5% would raise its total cost of goods sold to 2% or more than its current merchandise costs as a percentage revenue, ramping it up from 74.4% of sales to something closer to 76.4% of sales — at least.

That presents a considerable challenge. See, while most retailer’s profit margins are paper-thin, WMT’s are even thinner than usual. Over the course of the last four quarters, the company has only converted 3% of its sales into net income. Unless Walmart is able to cut costs elsewhere and/or pass those tariff costs along to its shoppers, per-share profits of WMT stock would be whittled back to little more than a breakeven.

In other words, Walmart stock’s future largely depends on how far Trump is willing to go in his quest to put America first.

Or, maybe it isn’t.

Bottom Line for Walmart Stock

While it’s true that the world’s largest retailer faces a considerable risk should tariffs be established (and assuming an all-out trade war isn’t started), the presumptions that WMT stock is doomed don’t consider a couple of critical realities.

One of them is the simple reality that if U.S.-made goods are made more price-competitive, than U.S. manufacturers will employ more people, and pay current employees better. That enlarges and empowers Walmart’s existing customer base, bolstering the top and bottom line.

The other reason true long-term Walmart stock holders may not want to worry: WMT was intentionally moving towards buying more “Made in the USA” goods anyway.

It has not been an initiative that has been free of criticisms, but in 2013, the company committed to buying an additional $250 billion worth of American-made inventory than it was previously planning on buying by the year 2023.

And that was before the President-elect served up a significant motivation to expand that initiative though. Now that it’s in WMT’s best interest to do so — and the fact that it can — the retailer may well do what some have considered unthinkable.

That is, sidestep the bulk of the tariff impact by buying even more American-made goods. Indeed, it’s not inconceivable to think that eventually the vast majority of its inventory could come from U.S. suppliers. It’s a true win-win, and the win for Walmart stock would be massive if Trump’s plans pan out.

Still, WMT stock isn’t for the faint of heart. Plenty could go wrong and spook investors along the way if Trump starts pulling all the levers at his disposable.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2017/01/wal-mart-stores-inc-wmt-stock-long-term-risk-big-upside/.

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