Walmart Inc (NYSE:WMT) has been consolidating nicely after its post-earnings decline. Given this recent solidifying, coupled with the company’s news that it’s expanding its grocery delivery efforts, is Walmart stock now a buy?
Right ahead of earnings, with WMT stock trading near $104, we said not to buy without a correction.
Specifically, we said we would be more interested in buying Walmart stock near $90. With the 200-day moving average just below, a lower valuation and better risk/reward, this patience only made sense.
Throw in the fact that the dividend yield would increase on the stock’s decline and that shares were up more than 50% over the past 12 months, and waiting for a decline made even more sense.
So now that we’ve got our correction, what’s the verdict?
First, the fundamentals.
Valuing Walmart Stock
Before the stock’s post-earnings fall, Walmart’s dividend yield was about 1.9%. Now sitting at 2.4%, it’s a bit more attractive. Admittedly, it’s not the sole reason to buy WMT, seeing as though there are plenty of other dividend studs one could chase. But at current levels, it’s not something to completely ignore.
Looking to growth, analysts expect 2.1% sales growth this year and 2.8% next year. That goes alongside 11.5% earnings growth in fiscal 2019 and about 7% growth in 2020. For this, we’re paying about 17.8 times this year’s earnings. That’s sort of a middle-of-the-road valuation. It’s not necessarily expensive, but it’s not cheap either.
On almost every metric — price to earnings, EV/EBITDA, price to free-cash flow — Walmart stock is expensive vs. its historical average. A bear might use that as ammunition to sell the stock. Bulls though will point to the company’s future. Given Walmart’s ~$3 billion purchase of Jet.com and recent expansion of grocery store delivery, it’s clear the retailer is ready to duke it out with Amazon.com, Inc. (NASDAQ:AMZN).
Growth for Walmart
It’s hard to imagine many picking Walmart to win the long-term fight, given the trend in e-commerce and Amazon’s position within that trend. But there’s nothing wrong with second place in this long-term battle. What makes beating Amazon so hard, aside from the strategic battle? Its investors. By allowing the company to operate with little to show for the bottom line, how can WMT compete? If profits dried up by 80%, investors would flip! They’d crush Walmart stock and management would be under a ton of pressure to produce.
Simply put, one investor base expects revenue growth (AMZN) and one expects profits (WMT).
To be fair, the latter of the two groups has become more lax with the company’s desire to put more resources behind growth initiatives. The latest of which is grocery delivery. While Amazon may have been taking share in electronics, video games and other household products, it really got board rooms across the country sweating when it acquired Whole Foods for more than $13 billion.
Walmart currently has grocery delivery in six metropolitan areas. By year-end it will have 100.
Some investors may resist the idea. But to compete with Kroger Co (NYSE:KR), Target Corporation (NYSE:TGT), AMZN and others, what’s Walmart to do? It’s not a great move for the company, but it feels like it’s one it has to do.
Blue Apron Holdings Inc (NYSE:APRN) bleeds a lot of cash. But its food delivery service is a popular one. With a $422 million market cap and a struggling financial setup, it’s not exactly a steal. But if Walmart can find a way to stem the bleeding and at least make the company cash-flow neutral, maybe that could make for a strategic fit.
Trading Walmart Stock
Momentum via the Moving Average Convergence Divergence (MACD) looks to be turning a bit more bullish. Walmart stock is sitting right on support (blue line No. 1) and on its 200-day moving average.
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Investors who like the fundamentals can bet on a short-term rebound with an attractive risk/reward. If this level gives way, we can cut our position with minimal losses and look for a retest of the $78 to $80 level.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
