There’s been a lot of optimism surrounding Wal-Mart Stores Inc (NYSE:WMT) ever since its last earnings report. In that report, WMT stock beat EPS by three cents and the top line by $2.2 billion. Perhaps the biggest shock was that same-store comps rose 2.7%.
Other good things are happening as well. In the food item division, the last report delivered a new six-year record for sales in that division. There’s also talk of WMT trying to take on the Amazon.com, Inc. (NASDAQ:AMZN) Go idea, which will do wonders as far as saving on labor, if the concept manages to scale.
But you have to look at WMT in context with what’s going on with the company and with retail in the days of Amazon. The fact is that Walmart is coming to the turnaround party very late in the game.
In fiscal year 2015, WMT had a net income of $16.3 billion. That number is expected to drop by about 9% or so to $14.8 billion the next year, and by another 7% to $13.7 billion the next year. Now, over the trailing 12-month period, net income has fallen all the way down to $11.6 billion.
That means WMT has lost almost a third of its net income in the past few years.
Now, that is bad news. However, the point of a turnaround is to grow earnings again. The challenge is that because of its size, WMT will have to grow earnings on a massive scale.
The purchase of Jet.com was a great move, but there are two elements to the food item division that I don’t like and that Walmart stock investors should consider.
First, WMT does not break out the revenue details for the division. I’m always suspicious of any operation that doesn’t disclose something. This is Walmart we’re talking about. It’s behaving like a fly-by-night microcap. That tells me that WMT doesn’t want us knowing just how little Jet.com is actually making.
Second, in its earnings presentation, it shows e-commerce operating losses will continue even into fiscal year 2019, and possibly beyond. So that’s not a good thing at all, either.
Which brings us to the uncomfortable discussion about valuation. Not that Warren Buffett is the definitive voice in the matter, but his Berkshire Hathaway Inc. (NYSE:BRK-B) did sell out of its entire position. I don’t blame him, given how Amazon is eating everyone’s lunch.
I don’t see how anyone can buy WMT stock at 26 times earnings when those earnings not only aren’t growing, but have been shrinking. If Walmart stock was paying a 5% dividend, that might make for a different story, yet it only pays a 2% yield.
The good news is that Walmart isn’t going away any time soon, certainly now with $20 billion in free cash flow in the most recent fiscal year. While that cash flow is three times what is needed to pay dividends, I would like to see management boost that yield a lot, especially given the recent corporate tax cut.
Bottom Line on WMT Stock
Think about it this way. Between Amazon and Walmart, which company is more likely to grow, and which is more likely to struggle in the coming years? That should tell you why selling WMT stock is probably the better move.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance, and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years’ experience in the stock market and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at [email protected].