The year-long rise in Walmart Inc (NYSE:WMT) stock, from about $70-per-share in February 2017 to over $110-per-share this February, is increasingly looking like a head fake. The jump in WMT stock was based on analysts pushing the story that Jet.com, acquired for $3 billion in 2016, would transform Walmart into an e-commerce giant that could challenge Amazon.com, Inc. (NASDAQ:AMZN) in the space.
Walmart’s online growth rate did shoot up, for a time, but as numbers get bigger, they get harder to push higher. When Walmart announced Feb. 20 that its online sales had grown more slowly than Amazon’s last Christmas, the orders to sell went out.
Now some analysts are starting to pound the table for WMT stock again, saying its recent fall is a buying opportunity. Don’t you believe them.
WMT Stock: Trouble Ahead, Trouble Behind
The best reason to sell Walmart stock today is the Trump Administration’s rumbling about tariffs, which is going to hike prices throughout the store and could start a consumer recession in Trump strongholds.
Walmart, like other low-price retailers, imports most of its goods. Many of these goods come from China, so a threat to cut world trade is going to hit it hard. The company’s sales are already growing at less than 3% annually — from $485 billion in 2016 to $500 billion last year — and its profit margins remain wafer-thin, with less than 2% of revenue hitting the net income line. Tariffs are going to raise prices.
What makes Walmart stock attractive, besides presumed growth that never comes, is its operating cash flow. The company had $28.3 billion in operating cash flow for fiscal 2018. But it had $31.5 billion in fiscal 2017, when the stock was trading much lower.
Walmart is also not well-positioned to withstand a recession. Its dominance in small towns makes it attractive to thieves. The crime problem is not new. Low prices, low staffing, and huge parking lots are a criminal magnet. A recession is going to make that much worse.
While CEO Doug McMillon has been obsessed with beating Amazon, meanwhile, its Sam’s Club stores have been getting crushed by Costco Wholesale Corporation (NASDAQ:COST). The company is closing 10% of those outlets, focusing on higher-income locations more like Costco’s own. It’s ironic because there is little difference between the two stores, yet shoppers will drive 10 miles out of their way to find a Costco and blow right by a Sam’s.
Fighting Back With Logistics
Walmart’s latest gambit is to use its logistical power to push meal kits. This is bound to kill Blue Apron Inc (NYSE:APRN), but if you’re thinking to buy Walmart thinking it’s about to replace your local Olive Garden, think again.
The meal kit business has huge spoilage risks. Those pre-sliced vegetables in the shrink-wrap package look great today, but how will they look tomorrow? If you put them on sale and someone gets sick, what happens next?
For Walmart, getting the quantities right is going to be a huge challenge. That may be why Kroger Co (NYSE:KR), which in theory is better-positioned, with smaller stores and large prepared food sections, has been moving toward it slowly.
The Bottom Line
Warren Buffett was never fooled by Amazon. He started selling his Walmart position in late 2016, and thus missed the run-up.
The reason is, he looked at the fundamentals and found the stock, at $70-per-share, to be fully valued. It was. At its March 6 opening price of $89, it was trading at nearly 28 times earnings. You don’t pay a premium for slow growth.
As the market falls, so will WMT stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he owned shares in AMZN.
