Walmart Stock Still Doesn’t Look Quite Cheap Enough

Advertisement

Simply put, I’m not sold on Walmart (NYSE:WMT). And for the most part, the market of late has agreed. Walmart stock hit $100 after earnings back in August. Since then, WMT stock has seen quite a bit of volatility, but at $98 sits roughly back where it started.

walmart stock wmt stock

Source: Shutterstock

The volatility makes some sense. There’s a lot going on here. Competition on the grocery side of the business gets only more intense. Walmart is pushing ecommerce heavily, through both acquisitions and internal spending, trying to keep up with the ‘omnichannel’ experience consumers increasingly expect. Broad market worries – and concerns about consumer confidence – have led to swings in WMT stock as well.

Looking through the noise, however, Walmart stock still looks a bit stretched. Profit growth simply isn’t that impressive, even with Q4 earnings beating expectations. And unless that changes, it’s tough to see WMT stock rising much further.

The Bear Case for WMT Stock

The core fundamental argument against Walmart stock is reasonably simple. WMT trades at its highest earnings multiple in years. The current price around $98 suggests a nearly 21x multiple to 2019 EPS estimates.

That’s a big number for WMT stock. This decade, the stock generally has traded closer to the mid-teens, which would value WMT closer to $75.

Bulls might retort that Walmart is a better company and that might be true, but so far, that improvement isn’t showing up in earnings. Guidance for fiscal 2020 (ending January) is for operating income to actually decline year-over-year, per the Q4 conference call. Management projects that earnings per share too will fall year-over-year.

To be fair, there are some one-time factors here. The most notable is the company’s acquisition of Flipkart last year. That business still is unprofitable, and will hit FY20 earnings.

Excluding Flipkart, management expects operating profit to rise. Meanwhile, a higher tax rate, guided to 26.5-27.5%, provides about a 3% headwind (although that higher rate is due in part to the fact that Flipkart’s losses will have a minimal tax benefit).

Still, even excluding both those factors, it’s not as if the underlying business is growing all that quickly. 21x earnings is a big multiple to pay for a company posting that type of modest growth.

And so the concern for WMT stock, particularly looking to the rest of 2019, is that the multiple can’t expand – and earnings likely won’t grow. If that’s the case, Walmart stock stalls out – at best.

The Case for Walmart Stock

To be sure, that case is too simplistic. Earnings growth will be muted in FY20, but in part because of rising wages and particularly investments in the ecommerce and omnichannel offerings. The increase in spend on both fronts should start to moderate going forward.

Not only will that spend moderate, but Walmart should see at least some return on those investments going forward. Ecommerce growth continues to be impressive, guided to 35% this year on top of 40% in FY19. Better offerings mean more customers. And the fixed-cost model and thin margins here mean that incremental sales should do wonder for earnings growth.

This is a better company than it was a few years ago. Same-store sales are growing much faster than they were. The outlook looks much brighter. WMT stock might have traded at 14-15x earnings in 2013 and 2014. That hardly means it should be valued the same way at the moment.

Watch the Business and the Economy

This is a better business, but it’s not perfect by any means. Omnichannel spend is going to pressure margins; it simply requires more resources to provide that level of service to customers.

Meanwhile, Walmart isn’t alone in making those kind of moves. Amazon.com (NASDAQ:AMZN) is building out its brick-and-mortar service, including reportedly considering a grocery store launch of its own. Target (NYSE:TGT) is having a great deal of success with similar efforts actually growing sales faster than Walmart did in Q4.

TGT stock is much cheaper as well, trading at closer to 13x earnings.

Competition is rising, which only adds to potential margin pressure on the grocery side. The struggles at Kroger (NYSE:KR) show how little pricing power retailers have. The collapse at Kraft Heinz (NASDAQ:KHC) shows that consumers aren’t paying up for brands anymore. Walmart’s scale provides it an edge but this still remains a tough business, and will be that way for the foreseeable future.

In that context, 20x+ earnings seems a hefty price to pay. And investors also need to keep an eye on the macro picture. It’s tempting to assume that WMT is a defensive or even countercyclical play: consumers presumably would head to the retailer to save money in a downturn. But Walmart stock dipped toward the end of the crisis, too; it took almost four years for WMT to return to its 2008 highs.

None of this is to say that Walmart stock is a short or even a definitive sell. Investors who trust the company’s strategy might see WMT very differently. But there are risks here and a real question as to just how high the earnings multiple here can go. If the low 20s are a ceiling (and that seems potentially to be the case) then WMT stock very well could stay stuck for quite a while.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2019/03/walmart-stock-wmt-stock-look-cheap-enough/.

©2024 InvestorPlace Media, LLC