Walmart Inc (NYSE:WMT) is having an eventful week. The company shocked analysts when reports announced that Walmart is considering buying health insurance plan provider Humana Inc (NYSE:HUM). Walmart stock dipped on the news. Indeed, a partnership between supermarkets and HMOs is not the most obvious fusion in the world. But read on — the deal does have some merit.
And the fun doesn’t stop there. Once defeated in China, Walmart is coming back for another go at it. Its new small-store concept with smart payments and a powerful partner could be the ticket to success there. If that wasn’t enough, Walmart also launched a fresh international payments platform this week. What’s it all mean for Walmart?
Why Walmart Wants To Sell Health Insurance
When the Humana story first broke, many commentators were confused. What synergies exist between Walmart and a major health insurer? But on a closer look, the $50 billion or so deal for Humana — which would be Walmart’s all-time largest buy — has strategic rationale.
For one thing, Walmart is already established in the health-care space. The company sells a whole lot of prescription drugs in its thousands of in-store pharmacies. As a result, it has an enviable heap of customer data that could certainly be put to good use combined with a major health insurer. With Amazon.com,Inc. (NASDAQ:AMZN) threatening to enter the space, and other major players such as CVS Health Corp (NYSE:CVS) and Aetna Inc (NYSE:AET) vying up, perhaps Walmart felt it should make a big splash to protect its turf.
In addition to the benefits on the Humana side of the business, don’t forget about the perks for Walmart’s stores. Tying people’s health care insurance to Walmart pharmacies should drive significantly more traffic into Walmart’s stores. The elderly folks who tend to use the health care system most also tend to prefer shopping in brick-and-mortar stores, and would likely add significantly to Walmart’s overall sales volume on non-health-care-related products.
Needless to say, this deal isn’t without risk. We still don’t know what the health care insurance market will look like in 10 years, particularly if a more liberal Bernie Sanders-style candidate wins in 2020. And more competition is a certainty, with Amazon entering the space, and other chief rivals merging. That said, this looks like the sort of transformative deal that could really reboot Walmart’s growth outlook –big revenue opportunity, substantial synergies, and on-point targeting toward the nation’s fast-growing over-65 demographic.
One small, but added kicker should be remembered. Walmart is the nation’s largest private employer, offering 1.5 million jobs. It presumably could leverage its Humana ownership to lower the considerable health care costs for covering its own army of employees.
Walmart and MoneyGram
The Humana story is far from Walmart’s only move this week. On Tuesday, Walmart unveiled a new initiative with leading international payments firm Moneygram International Inc (NASDAQ:MGI). A Chinese suitor had intended to buy Moneygram recently, but the deal was scuttled by regulators. Since then Moneygram has been seeking new partners, ranging from as eclectic as the cryptocurrency Ripple to, now, Walmart.
This new service will be called Walmart2World. And the name does a good job of summing up the business model. Customers will be able to go to any Walmart in the United States, drop off funds, and have a recipient pick them up in 200 countries around the world. And it’s true — in my foreign travels, I’ve seen Moneygram just about everywhere.
Walmart is making a nice move here. Their customer base tends to be middle-to-lower class folks, and consists of a lot of immigrants. The company has prioritized Spanish-language customer relations, and thus this should integrate nicely with the burgeoning market for money transfers to Latin American countries. While the overall market here probably isn’t that large, the profit margins are gigantic. According to Moneygram’s website, a $100 transfer from the United States to Colombia, for example, would have a $9.99 fee plus a foreign exchange charge. And yet the cost of fulfilling that transaction is minimal to both Moneygram and Walmart. By contrast, Walmart has to sell a lot of produce or cleaning supplies to earn the same sort of income after all overhead.
New Walmart Stores in China
Walmart’s shrewd acquisition of 10% of China’s JD.com Inc(ADR) (NASDAQ:JD) continues to provide the company with opportunities. Earlier this week, Walmart announced that it will be opening its first physical grocery stores in China.
These will be compact Walmart locations, with just about 8,000 items stocked. The items sold will also be available online. Customers choosing online delivery within a 2-kilometer (1.2 mile) radius can get delivery within half an hour. For in-store shoppers, Walmart will be offering smart payment methods such as via WeChat. This new launch shows Walmart’s ability to pioneer new retail concepts. It also further builds out the company’s pivotal strategic alliance with JD.com. JD is looking more and more like China’s Alibaba Group Holding Ltd (NYSE:BABA) and Walmart’s move to buy a large chunk of it looks ever smarter over time.
Verdict on Walmart Stock
Walmart stock is now at 16x forward earnings. That’d be fairly priced, if not a touch expensive, for a traditional retailer. But Walmart is increasingly a growth company again. From daring acquisitions to crafty overseas partnerships and its underrated Jet.com buy a few years ago, Walmart’s management is showing it has got the nerve to make big plays.
Given Walmart’s uneventful stock performance over the last 15 years, many investors think you just own WMT for the dividend. But this might be the time to change that opinion, especially with the recent Walmart stock price correction. If the Humana deal ends up delivering, shares here could soar.
At the time of this writing, the author held JD stock and HUM stock and had no positions in any other of the aforementioned securities. You can reach him on Twitter at @irbezek.