Walmart Stock: Not Filling My Basket Here
Contributor since 2011 / 24336 Followers
Summary:
- Walmart Inc. shares have recovered and are trading near all-time highs after a setback in 2022 due to pandemic-related trends and inflation concerns.
- The company has posted solid financial performance, with margin expansion and increased earnings per share.
- Walmart has set ambitious targets for sales growth and operating margins, but earnings multiples remain high, raising caution for investors.
Joe Raedle
Shares of Walmart Inc. (NYSE:WMT) have been in a decent recovery mode, recently trading at $158 per share, just two dollars from their all-time highs. This came after shares had seen a setback in 2022, as investors feared a reset of the performance with pandemic-related trends on their retreat, all while inflation threw in a wildcard with regard to the business performance.
Such solid performance has surprised me a bit, as I believed it was not yet time to go shopping in March. This came after I have been skeptical about Walmart’s ability to post operating margins in a 5-6% range, which they have done for years and decades, with margins likely trending closer to 4% in more recent times.
Being skeptical about the company’s ability to return to the historical margin range, I furthermore believed that valuations were fair already, if the company would be able to do the hard work with regard to margins, making me to have a cautious stance at levels around the $145 mark.
Creating Perspective
Early in 2021, Walmart posted 2020 results which of course was a year dominated by the pandemic, having both favorable and less favorable impacts on the business. Revenues rose by 7% to $559 billion as operating earnings actually rose by 10% to $22.5 billion, yet operating margins of 4.0% trailed the long-term margin performance quite a bit, with earnings reported at $5.50 per share.
2021 was another year which required some explanation, as the company divested the underperforming ASDA assets in the UK, which made that full year sales were up just 2% to $572 billion, as operating profits rose to $26 billion, for margins equal to 4.5% of sales.
This margin expansion came as pandemic-related costs were on the retreat, while the underperforming ASDA assets were divested as well, as margin expansion made that earnings per share rose to roughly $6.50 per share. These achievements made that shares peaked at $160 in April 2022, yet that was ahead of an environment in which inflation and interest rates were on the rise, something which Walmart was struggling with.
The company grew first quarter sales in 2022 by 3%, as earnings came in a bit light and inventory levels were ballooning. The company saw more of these trends in the second quarter, and actually trimmed the 2022 earnings outlook to earnings of $5.80-$5.90 per share. Shares fell to the $120 mark at the time, as instead of improving margins, these margins were set to fall below the 4% mark.
Inflationary trends made that the company grew 2022 sales by 7% to $611 billion, despite dollar headwinds and the impact from some minor divestments. Operating profits fell by 5% to $24.7 billion, as margins fell to just 4.0%, with GAAP operating margins coming in a bit lower. Adjusted earnings came in at $6.29 per share, better than feared, yet GAAP earnings were quite a bit lower due to opioid settlements, reconciliation charges and losses on equity investments.
Net debt (excluding lease obligations) was pretty stable at $30 billion, as debt is never a great concern with Walmart. The company guided for a 2.5-3.0% increase in constant currency sales growth in 2023 (which is Walmart’s fiscal year 2024), but failed to break down the price/inflation and volume component of this growth, with adjusted earnings seen down a bit further to $5.90-$6.05 per share.
With the company trading at 24 times adjusted earnings in April, I was a bit cautious here. The big issue is that this is based on 4% operating margins, or below that, which makes that every point in margins could boost pre-tax earnings by $6 billion. A point improvement in margins could result in earnings of around $7.50 per share, creating a fair valuation at 19 times earnings, as such an achievement would be a daunting task, however.
Moving Higher
Since the end of March, shares of Walmart have steadily moved higher to trade at $158 per share here, marking another 10% return in the time frame of little over a quarter, which is a decent performance.
Early in April, Walmart outlined its targets for the next 3-5 years in the Investment Community meeting which included 4% sales growth and +4% operating margin targets for the coming years. The company furthermore outlined some ambitious targets with the usage of technology and adoption of automation, in an order to squeeze out productivity over time.
By mid-May, Walmart reported first quarter results for the fiscal year 2024 and they were strong. First quarter sales rose by 7.6% to more than $152 billion, with operating profits rising by 17% to $6.2 billion, for margins of 4.1% of sales. This was up 40 basis points on the year before, with adjusted earnings up seventeen cents to $1.47 per share.
On the back of the results, the company hiked the full year constant currency sales guidance to 3.5%, which after the strong first quarter, is actually not that convincing. After all, if this is really Walmart’s best revenue growth best guess, growth would be very modest in the remaining three quarters. Adjusted earnings are now seen between $6.10 and $6.20 per share, up $0.15-$0.20 per share from the previous guidance.
This means that the company trades at 25-26 times adjusted earnings, very steep multiples by all means, yet with adjusted profits being down for two years in a row now. Investors are really anticipating that margins will revert at some point in time, bringing down the valuation to a more reasonable multiple.
Still Urging For Some Caution
While I was pleased to see a solid first quarter earnings report, and the adjusted guidance for the year is likely lowballed, Walmart Inc. earnings multiples remain very demanding.
While the company targets >4% operating margins and similar sales growth in the coming years, that feels a bit unambitious to me, if you ask me, unless the market is valuing Walmart more like a technology firm rather than a dominant retailer.
The Walmart Inc. business is likely a long-term winner by its sheer scale, but I am cautious here as I fail to see a convincing risk-reward proposition.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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