Walmart (NYSE:WMT) should not be a momentum stock. Right now, it is. After reporting earnings $3.29 billion, or $1.16 per share, on revenue of $129 billion, for the quarter ending in October, WMT stock is due to open this morning at just shy of $119 per share.
That’s a market cap of $338.1 billion, and a price to earnings ratio of 23.8. The yield on the 53 cents per share dividend is down to 1.76%.
Rather than arguing with the market, or saying again that Walmart is overvalued, it might be better to ask why investors love it so in 2019. And they do love it. Even with its latest post-earnings pullback, WMT stock is up nearly 28% on the year. That’s twice the gain of Amazon (NASDAQ:AMZN), which is up 13%.
Why We Love Walmart
In its third fiscal quarter Walmart sales rose 3.2%, year over year, and e-commerce sales surged. Profits rose, and the company raised guidance.
The reason for this, in two words, is fresh food. Groceries represent 56% of Walmart’s sales. Shoppers prefer Walmart’s curbside pickup to even shopping in the store. The company is trying to take advantage by offering to put groceries right into customers’ refrigerators . (Like that doesn’t sound creepy?)
The biggest loser here isn’t Amazon, but Kroger (NYSE:KR), which committed to doing grocery delivery through automated warehouses licensed from Ocado. Analysts now consider that move misguided, even as it breaks ground on the sixth of what are supposed to be 20 regional centers.
Walmart’s success is said to be part of a mega-trend. Online sales represent 3% of the grocery category right now but are expected to hit 20% of it in five years, following patterns set in South Korea and Japan.
Why Walmart is Worried
The problem, as Walmart management admitted in its conference call. is that grocery is a very low-margin business. People are just picking up groceries, not higher-margin merchandise.
While Walmart’s pick-up success has the potential for spectacular growth, investors are buying potential ahead of reality. Walmart’s revenues for its first three quarters are up just 1.8% from a year ago. Walmart’s margins in the U.S. are down on the year and it’s projecting earnings growth of under 10%.
That’s not going to be enough to justify the current valuation, a P/E within touching distance of Microsoft (NASDAQ:MSFT), which is at 27.9x, and with only a slightly higher yield.
The competition is not standing still. Amazon is launching a second grocery chain, and Kroger is launching in-store pick-up. The real winner in the retail space this year has been Costco Wholesale (NASDAQ:COST). Its stock is up by one-third this year, with sales up nearly 8%, net income up 11%, and strength in all merchandise categories, not just grocery.
Bottom Line on WMT Stock
Walmart has grown by changing in some ways but remaining true to itself in others. It still sells guns, and it still puts merchandise in plastic bags. WMT stock’s success may be due, in part, to its perceived advantage against Amazon, and the growing backlash against its Seattle-based rival.
But Amazon is still catching up. If it hits its expected fourth quarter sales of $86 billion, Amazon will have 2019 sales of almost $280 billion, with growth of 20%. Walmart is still bigger, but only by 87%. Last year it was over twice as large by sales. Amazon is also drawing more of its revenue to the net income line than Walmart, over $10 billion last quarter against Walmart’s $6.7 billion.
Stay tuned. In this drama, Ahab has yet to slay the white whale.
Dana Blankenhorn is a financial and technology journalist. He is the author of the environmental story, Bridget O’Flynn and the Bear, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, KR, and MSFT.