Wall Street Lunch: Walmart’s Earnings And Vizio Deal In Focus

Summary:

• Walmart tops Q4 earnings, announces deal to buy Vizio for $2.3B.
• The U.S. Leading Indicator Index dipped 0.4% to 102.7 in January.
• Goldman Sachs boosts PT for broader market and for earnings this year and next, due in large part to the megacaps.

Listen below or on the go on Apple Podcasts and Spotify

Nvidia is due for the most important earnings report in years. (0:15) Walmart reports results ahead of stock split. (2:05) How do the biggest modern bubbles look today? (4:59)

This is an abridged transcript of the podcast.

Our top story so far

Walmart (NYSE:WMT) topped consensus estimates with its Q4 earnings report.

Comparable sales in the U.S. rose +4% to top the consensus estimate of +3.2%. Transactions were +4.3% higher during the quarter. E-commerce sales rose +23% and contributed 240 basis points to comparable sales.

Walmart’s global advertising business grew about +33%, including 22% for Walmart Connect in the U.S. Walmart’s consolidated gross margin improved by 39 basis points.

Walmart also confirmed that it is acquiring Vizio (VZIO) for $11.50 per share in cash, which works out to a fully diluted equity value of around $2.3 billion. Vizio stock had surged last week on reports that talks were ongoing.

The acquisition of VIZIO and its SmartCast Operating System is expected to enable Walmart to connect with and serve its customers in new ways, including innovative television and in-home entertainment and media experiences. Walmart said the deal will also create new opportunities to help advertisers connect with customers.

Also of note, the average ticket for Walmart shoppers was down 0.3% for Q4. But on the call, the CEO said the deflationary trends the retailer was seeing in Q3 were easing back somewhat.

Recently, Morgan Stanley issued a note that highlighted increased uptake and interest in weight-loss drugs, and those who use them are spending less when shopping for food.

An updated Numerator survey of 92,000 people showed that 12.3% of households indicated that they had a member taking GLP-1s like Novo Nordisk’s (NVO) Ozempic and Wegovy and Eli Lilly’s (NYSE:LLY) Mounjaro and Zepbound.

Analyst Pamela Kaufman says: “Monthly spend on categories most negatively impacted by GLP-1 users for weight loss include snacks, pastries, and ice cream, while yogurt, fish, and vegetable snacks are most positively impacted. Our prior survey work suggests a notable reduction in the consumption of less healthy categories when taking GLP-1 drugs.”

“When monthly grocery spend is indexed to adjust out the aforementioned differences, GLP-1 (household) monthly grocery spend decreased anywhere from 6% to 9% more than the change in spending among non-GLP-1 households.”

Among other active stocks

Home Depot (HD) was under a little pressure despite topping Q4 revenue and EPS estimates. The company reported EPS of $2.82 for the quarter vs. $2.78 consensus and $3.30 a year ago.

Comparable sales were down -4.0% in the U.S. vs. -3.8% consensus. Total comparable sales decreased -3.5% during the quarter vs. -3.6% consensus. Customer transactions were down 1.7% to $372 million. The average ticket for customers was 1.3% lower, at $88.87. Sales per retail square foot dropped 3.6% to $550.50.

Medtronic (MDT) beat on the top and bottom lines for fiscal Q3. For the rest of the fiscal year, the company raised organic revenue growth guidance from 4.75% to 5% from the prior 4.75% and non-GAAP EPS guidance from the prior range of $5.13 to $5.19 to the new range of $5.19 to $5.21 vs. the $5.16 consensus.

And several Wall Street firms are expecting a “beat and raise” print from Nvidia on Wednesday.

Wedbush analyst Dan Ives says it’s “all about the pace of data center AI-driven spending as the only game in town for GPUs to run generative AI applications all go through Nvidia.”

Rosenblatt Securities analyst Hans Mosesmann likes the strong product momentum, including in its Hopper, Grace-Hopper, networking, and software segments.

In today’s trading

Stocks are slightly lower to start the holiday-shortened week. The major averages are down less than -0.5%.

Rates are lower, following a global trend after China cut its five-year lending rate in another effort to shore up its ailing stock market. The 10-year Treasury yield (US10Y) is back below 4.30%.

The Conference Board’s measure of leading economic indicators fell more than expected, down -0.4% to 102.7 vs. the -0.3% fall expected.

Speaking of recession, Citi economists are breaking with the pack on the U.S. outlook, saying a soft landing isn’t happening.

They say the economic numbers last week “confirm that a soft landing has not been achieved” and makes them “convinced” there won’t be one.

The latest BofA Global Fund Manager Survey showed that for the time since April 2022, money managers are not predicting a recession, with 2/3 going for a soft landing, 1/5 saying no landing, and just 1 in 10 going for a hard landing.

But Citi argues the 0.39% month-on-month rise in January core CPI “shows that inflation remains more elevated and more volatile than pre-pandemic—six-month core PCE inflation will now rise to 2.4% from 1.9%.”

“Declining retail sales, manufacturing production, and rising, continuing jobless claims all point to a softening economy.” Citi is calling for the first rate cut of 25 basis points to come in June, “”around the same time the economy is more clearly entering recession.”

And in the Wall Street Research Corner

The Goldman Sachs equity team is on the Magnificent 7 bandwagon, boosting its price target for the broader market. The team lifted its S&P 500 target just slightly above current levels to 5,200.

Strategist David Kostin raised the top-down S&P 500 EPS forecasts to $241 in 2024 and $256 in 2025, up from $237 and $250.

“The 4Q earnings season also highlighted the ongoing fundamental strength of the mega-cap ‘Magnificent 7’ stocks.” Kostin said. “If NVDA reports estimates in line with consensus, the Magnificent 7 will have grown sales by 15% year over year and lifted margins by 582 bp year over year, leading to earnings growth of 58%.”

“In contrast, the remaining 493 stocks in the S&P 500 grew sales by 3% year over year while margins contracted by 56 bp and earnings fell by 2%.”

“During the past 3 months, Magnificent 7 earnings estimates have been revised upwards by 7%, and margins have been revised upwards by 86 bp. This compares with a 3% downward revision to earnings and a 30 bp downward revision to margins for the remaining 493 stocks. The Magnificent 7 accounted for 11% of total 2023 S&P 500 sales and 18% of earnings, and consensus expects the stocks to grow EPS by 20% in 2024.”

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