Walmart Earnings Were Good, but WMT Shares Are Overvalued

The world’s largest retailer, Walmart (NYSE:WMT), reported second quarter numbers in mid-August that absolutely crushed expectations and flexed huge comparable sales growth, huge revenue growth, huge e-commerce growth and meaningful profit margin expansion for Walmart stock.

Source: Sundry Photography / Shutterstock.com

Yet, Walmart stock – which is up 15% over the past six months – dropped despite the strong numbers. Normally, when a hot stock fails to rally on strong numbers, that’s a sign of a valuation friction and rally exhaustion.

I think that’s exactly what you’re getting with WMT today.

At current levels, Walmart stock is overvalued, while the company’s growth trajectory is set to significantly decelerate in the back-half of 2020 as bulk buying behavior moderates. That isn’t a recipe for WMT shares to keep shooting higher. Rather, it’s a recipe for shares to fall flat in the coming months.

Here’s a deeper look.

Strong Walmart Earnings

Walmart’s second quarter earnings report was – as one would expect – very strong.

Comparable sales in the quarter rose 9.3%. Revenue rose 7.5%. Digital sales jumped 97%. All of that is totally expected, as the novel coronavirus pandemic has ushered in a temporary era of consumer bulk buying from superstores, of which Walmart is the biggest and often the cheapest destination.

At the same time, Walmart turned this increased scale into positive operating leverage. Gross margins in the quarter rose 63 basis points. Adjusted operating margins rose about 40 basis points. Adjusted operating profit dollars 18.6% year-over-year.

Net net, it was a solid quarter which showed that management is perfectly capitalizing on changing consumer behavior, and turning that changing consumer behavior into supercharged profit growth.

That’s the good news.

Moderating Covid-19 Tailwinds

The bad news is that common sense and management’s commentary imply that the company’s big Covid-19 tailwinds are already moderating, and will continue to moderate going forward.

In short, the best of the Walmart “surge” is over.

That’s because consumers are becoming less and less afraid of the virus, more and more stores are opening up, and consumer behavior is rapidly normalizing. Don’t get me wrong. Bulk buying is still a very real thing. But the intensity and frequency of bulk buying is easing relative to where it was in March and April.

As it has, Walmart’s comparable sales growth trends normalized. In July, comparable sales rose just 4%, a steep fall off from the 10% comp reported in Q1, and much more in-line with the company’s pre-pandemic comps.

To that end, Walmart’s numbers in the third and fourth quarters of 2020 will look more like the numbers from the back half of 2019 than the first half of 2020. That means slower revenue growth. Smaller comps. Less margin expansion. And weaker profit growth.

That’s a not a great backdrop for Walmart stock, especially since shares are rushing into this slowdown at a premium valuation.

WMT Shares Are Overvalued

I wouldn’t be concerned about the coming slowdown in Walmart’s growth narrative if I felt it was appropriately priced into WMT stock.

But it’s not.

Going into this slowdown, Walmart stock is trading at one of its most premium valuations, ever. The trailing sales multiple currently sits above 0.7, a ~40% premium to the stock’s five-year-average trailing sales multiple. The forward earnings multiple sits at 27, also a ~40% premium to the stock’s five-year-average forward earnings multiple.

Sure, we can chalk some of this premium up to the company’s budding e-commerce business, and another part of it up to the coming launch of Walmart+. But those two factors do not warrant a 40% valuation premium, especially with a growth slowdown on the horizon.

As such, I think it’s quite likely that valuation friction causes Walmart stock to fall flat over the next few months.

Bottom Line on Walmart Stock

I like Walmart as a company. Huge moat. Great value prop. Strong customer loyalty. Good innovation with e-commerce, omni-channel and the subscription business. Steady growth trajectory and margins.

This company will grow at a nice and slow pace over the next several years.

But Walmart stock today is priced for more than nice and slow. And that’s why I’m not chasing the stock up here.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been rated one of the world’s top stock pickers by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, Luke Lango did not own a position in any of the aforementioned securities. 


Article printed from InvestorPlace Media, https://investorplace.com/2020/08/wmt-earnings-were-good-but-walmart-stock-is-overvalued/.

©2021 InvestorPlace Media, LLC