Following a positive earnings report, many have become bullish on Walmart (NYSE:WMT). The Bentonville, Arkansas-based retail giant beat earnings and revenue estimates in its fourth-quarter report. The company has proved itself as a resilient omnichannel retailer despite the rise of e-commerce. This led to a dramatic increase in Walmart stock in 2016 and 2017.
Still, WMT stock pulled back in 2018 amid a U.S.-China trade war. Many feel like this stock will take off once a U.S.-China trade agreement expands the company’s access to cheaper Chinese goods.
However, given the slower overall growth predicted for WMT stock, I see any China trade agreement as a reason to sell the news.
Optimism Abounds on Walmart Stock
At first glance, one might wonder why they should not get excited about Walmart stock. Investors overreacted a few years ago when they believed a “takeover of retail” by Amazon (NASDAQ:AMZN) would come soon. Instead, Walmart managed to leverage its brick-and-mortar stores to deliver an omnichannel experience Amazon could not match. Now, we are seeing Amazon build a growing collection of physical stores to compete.
Also, the board of directors raised the annual dividend by four cents per share. Owners of Walmart stock will now receive $2.12 per share in payouts every year. This marks the 44th consecutive year Walmart has raised its dividend. It also takes the yield to about 2.15%, slightly higher than the S&P 500 average.
Moreover, both the U.S. and China say they have reached the “final stages” of hammering out a trade deal. Due to Walmart’s dependence on imports from China to maintain low prices, an end to the trade war would logically bolster the profits of Walmart stock in the coming quarters.
China Trade, E-Commerce May Not Help Enough
However, I disagree with those who think this will boost Walmart stock in the near term.
For one, as our own Josh Enomoto points out, the U.S.-China trade war did not hit Walmart stock as hard as the equities of most of its peers. Indeed, most competitors saw larger declines than the 4% drop WMT stock experienced in 2018. Also, I expect profits in WMT to rise with a trade agreement. Profit growth should also turn positive.
The question is how positive is this growth? Yes, during the fourth quarter, e-commerce sales rose 21% overall and 43% within the U.S. However, e-commerce revenue only makes up a small fraction of the company’s revenues. Overall revenues for the fourth quarter increased by a more modest 3.1%.
Struggles Outside of the U.S. Continue
Aside from the labor woes that have plagued Walmart for years, its failed execution outside of North America should lead investors to question long-term growth prospects. Despite overall growth, international sales fell by 3.2%. When dealing with a saturated market at home, the failure to execute abroad should concern investors.
Succeeding overseas is far from impossible. Retailers such as Costco (NASDAQ:COST) and Starbucks (NASDAQ:SBUX) have seen more success abroad. Walmart became one of the first U.S. retailers when China when it entered the market in 1996. More than 20 years later, Walmart operates only 424 retail stores in China, hardly penetration in a country of almost 1.4 billion people.
Walmart has also left countries completely after it failed to impress local customers. The company is trying again in India through online store Flipkart. Walmart has yet to report specific results on Flipkart, so we do not know if and how well this online venture in India has succeeded.
Walmart Stock Is Not Cheap
Analysts expect to see a 3.1% drop in profits this year, and 5.5% profit growth in 2020. For this growth, investors will pay about 19.5 times forward earnings. While that may come in cheaper than Amazon or Costco, those companies enjoy double-digit profit growth.
Moreover, buyers can also purchase Target (NYSE:TGT) at a forward price-to-earnings (P/E) ratio of 13. Wall Street predicts average growth of 8% per year for TGT over the next five years. This is more than double Walmart’s 3.53% growth rate for the same period. Target investors will also receive a 3.5% dividend yield with a comparable track record of annual payout increases. This exceeds WMT’s yield by about 63%
Further, the decline may have already begun. The stock still has not recovered from the November high of $106.21 per share, and the post-earnings rise in the stock price reversed quickly. At about $98 per share, Walmart stock trades slightly below the levels it saw prior to the earnings report. Hence, when looking closer, investors have good reason to question the positive narrative on WMT.
The Bottom Line on Walmart Stock
Investors should sell the news on Walmart stock once the U.S. and China announce a trade deal. Yes, it should reverse declining profits once the U.S. and China agree on a trade framework. Walmart has also proven that it will continue its growth and itself become a player in the e-commerce space.
However, overall, Walmart is an older, slower-growth retailer. This growth will remain slow as it continues its lackluster performance internationally. As long as these struggles remain, I would avoid Walmart stock.
As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.
