The large numbers associated with Walmart (NYSE:WMT) never cease to amaze me. 4,743 Walmart stores in the U.S. and another 6,101 abroad. 2.3 million global employees generating $559 billion in annual revenues. 150 distribution centers, more than 6,000 tractors and more than 60,000 trailers.
Walmart’s cumulative infrastructure investment and revenues are larger then all but 25 countries on the planet.
Companies this size do have a hard time finding meaningful growth as giant new Walmart supercenters won’t likely be build in any material way. However Walmart.com is the second largest eCommerce player after Amazon (NASDAQ:AMZN). It’s about one-fifth the size of Amazon’s sales but is growing fast. In 2020 Walmart eCommerce grew 79% while Amazon’s retail business grew 34%.
As Walmart races to catch Amazon in the eCommerce game, they are spending and investing heavily in online and omni-channel initiatives. As a separate segment, Walmart.com operates at a loss, currently estimated at approximately $1 billion. That heavy spending also distorts the P/E ratio for WMT stock, as the eCommerce business is expected to eventually generate billions in operating profits.
However, Walmart management’s apparent obsession with Amazon and the desire for Walmart.com to be #1 in eCommerce is worrying. I never understood why certain companies, and Walmart may fall into this category, have to be #1. Why not just produce strong and consistent double digit revenue growth as well as a satisfactory return on capital above their cost of capital. That’s it! That’s all they need to do. Massive spending to be #1 instead of just excellent may eventually end up being detrimental to Walmart shareholders.
Walmart’s international business has 6,101 stores and operates in 25 countries using over 50 brands such as Asda, Massmart, Seiyu and Walmart de Mexico. Steady revenue growth is often elusive for this segment due to currency fluctuations and the changing ownership structures of their overseas interests. However the international business is profitable with operating margins of 3.0%, 2.8%, and 4.0% over the past three years.
If this segment was ever spun off as a publicly traded company, it may garner high emerging market valuations. For this year, Walmart International is expected to grow faster than the U.S. business on a constant currency basis.
Started in 1983, Walmart’s version of a bulk, or wholesale store model has grown to 599 stores. Sam’s Club is about one-third the size of Costco (NASDAQ:COST) with revenues of $63 billion compared to revenues of $184 billion for Costco.
It may be wise to spin off Sam’s Club at some point. Although doubtful it could obtain Costco’s high valuation multiple, the focus of a stand alone company may be beneficial to shareholders.
WMT stock trades at 26 times this year’s estimated EPS with an enterprise value of 12.3 times. Walmart’s historical P/E ratio has averaged in the low-to-mid teens for most of its history. The law of large numbers and the large established physical store base typically inhibit the rapid growth that can lead to a higher P/E ratio.
WMT’s current high valuation ratios may just be a factor of the crazy stock market environment that we’re living through. However, one needs to factor in the billions that is being spent on eCommerce initiatives. That spending is temporarily depressing EPS numbers until the eCommerce segment generates profits on a stand-alone basis. That brings down the “normalized” P/E a couple of notches.
In addition, the International segment has below company average operating margins and is depressing overall results. As operations in various countries can bring their infrastructure up to what domestic units have achieved, that will bring an additional boost to EPS down the road.
WMT stock is not cheap, but on the other hand, its not substantially overvalued due to the factors mentioned above. Short-term investors may wait for a slightly cheaper entry point to be on the safe side, but longer-term investors should buy now if their holding period is five to ten years.
On the date of publication Tom Kerr did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Tom Kerr, CFA, is an experienced investment manager and business writer who has worked in the investment and securities business since 1994.