Improvements Do Not Justify the Higher Multiple in Walmart Stock

Walmart (NYSE:WMT) stock continues to surge higher. Amid massive e-commerce growth and improving same-store sales, both the WMT stock price and its valuations continue to climb. As a result, the Walmart stock price now hovers above $113 per share, less than 2% lower than its all-time high.

Walmart stock can no longer justify its rich premium
Source: Shutterstock

However, overall growth remains meager, and the big-box retailer continues to struggle in its ventures outside of North America. As a result, its earnings multiple has moved far ahead of company and industry averages. The high valuation and modest income growth indicate investors should begin considering alternatives to Walmart stock.

WMT Stock Surged on E-commerce, Business Improvements

Walmart has not changed as much as management would like you to think. Many will take issue with that statement, mainly because of its relatively new e-commerce segment. Admittedly, this omnichannel segment renewed investor interest in WMT stock. As a result, shares now trade at a forward price-to-earnings (P/E) ratio of 22.5.

To be sure, traders had become overly pessimistic about the Walmart stock price in the middle of this decade. At the time, an attitude that Amazon (NASDAQ:AMZN) would “take over retail” gripped Wall Street. Investors treated WMT stock as if it were the next Sears Holdings (OTCMKTS:SHLDQ) or JCPenney (NYSE:JCP).

Walmart, as well as peers such as Target (NYSE:TGT) and Costco (NASDAQ:COST), responded with an omnichannel strategy. As a result, valuations and sentiments have moved to the other extreme.

In fairness, same-store sales also saw improvements during this time. Moreover, the current CEO has shown more interest in addressing worker complaints than his predecessors. It may not bring comfort to customers that one of the gripes involved “hygiene,” but management has begun to respond to these issues.

Many of Walmart’s Core Problems Remain

Nonetheless, challenges remain. As our own James Brumley mentioned, e-commerce losses now surpass $1 billion per year, despite e-commerce sales growing by 37% during the last quarter. Mr. Brumley argued that overall profits more than compensate for this loss. He also believes that investors should give Walmart stock the kind of latitude to succeed once granted to Amazon.

However, e-commerce only made up 1.4% of sales, and overall growth remains modest. Revenue only grew by 1% in the previous quarter. Furthermore, over the past five years, profits increased by an average of 0.29% per year. Analysts believe they will now grow by 3.69% per year over the next five years. An improvement, yes, but does that truly justify 22.5-times forward earnings?

Moreover, Walmart still suffers from saturation at home and an inability to gain traction abroad. Many remember high-profile failures in places such as Germany and Brazil. Its modest store count more than 20 years after it became one of the first retailers to enter China also does not inspire confidence. Much of the international focus has switched to Flipkart, its e-commerce company in India. However, our own Vince Martin thinks Flipkart caused the aforementioned $1 billion-plus e-commerce losses.

TGT Stock Offers Higher Growth at a Lower Cost

Additionally, investors can choose more reasonably-priced alternatives, one of which is archrival Target. TGT stock trades at a much lower 13.8-times forward earnings. Also, its dividend yield of 3% comes in well ahead of Walmart’s return of under 1.9%.

Further, despite not having a presence outside of the U.S., Wall Street predicts average annual growth of 8.35% per year over the next five years. This comes in at more than double Walmart’s expected increases in earnings.

Both Home Depot (NYSE:HD) and Lowe’s (NYSE:LOW) have found growth avenues despite negligible store growth. Perhaps Walmart can do the same. However, until it can either grow internationally or at home, I see little reason to buy Walmart stock right now.

Final Thoughts on Walmart Stock

Given high valuations and low growth, paying 22.5 times earnings for Walmart stock makes little sense. Walmart has excited Wall Street with omnichannel retailing. It has also found a way to increase same-store sales, and the company has made more of an effort to improve its image.

Nonetheless, growth remains meager. And it faces ongoing struggles with saturation at home and an inability to connect with consumers outside of North America. Not to mention, investors can buy a lower-cost, faster-growing retail business in Target.

Until Walmart can lower its valuation or increase its overall revenue growth, investors should stay away from WMT 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.

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