One of GuruFocus’ recent feature additions is the investing checklists. Users now have five pre-existing checklists to evaluate stock picks, or create a personalized checklist. These lists are automatically saved on the stock’s page.
In previous articles in this series, I evaluated Twitter (TWTR) according to Peter Lynch’s Fast Grower checklist, as well as PepsiCo (PEP) according to Lynch’s Stalwart checklist. In this article, I’ll use Walmart (WMT, Financial) as an example to illustrate the Ben Graham Net-Net checklist, one of the five existing lists GuruFocus provides.
It’s important to keep in mind that the score at the conclusion of this article is not a recommendation to buy or sell the stock. Each of the checklists include questions that are subjective and will vary with each investor, and is precisely why the lists are valuable for determining whether they belong in your portfolio.
Is the stock price less than 2/3 of net current asset value?
No, Walmart’s net current asset value per share is -19.5, while the current stock price is $85.77. The following graph depicts Walmart’s NCAV per share over time.
Safety (risk of bankruptcy, dilution, etc.): Does the company have a lot of debt?
Walmart’s current long-term debt is $44,559 million.
One warning sign is the company’s current ratio, which is 0.88. This number below 1 indicates Walmart cannot cover its short-term liabilities. While this doesn’t necessarily mean the company is facing bankruptcy, it is not a good sign for Walmart’s financial health.
Walmart’s current ratio is also lower than the industry average for retail defensive companies at 1.08.
The company’s cash to debt ratio is 0.12, which is calculated by dividing cash and cash equivalents by debt. A ratio of less than 1 means Walmart cannot pay off its debts with cash on hand.
GuruFocus rates Walmart’s financial strength as 6/10, which is based on the debt burden as measured by the interest coverage, the debt to revenue ratio, and the Altman Z-score. The company’s current interest coverage is 11.51, which is comparable to the industry average of 12.72. Interest coverage is calculated by dividing operating income by interest expense; therefore, the higher the number, the better.
What is the cost structure? What if the company’s revenue declines but the cost stays the same?
Walmart is well-known for its efficient supply chain management that allows it to keep prices low. The company began working directly with manufacturers in the 1980s in order to cut costs, according to TradeGecko, an inventory management blog. With more than 10,900 points of distribution globally, the company’s 2014 annual report stated that investing in everyday low prices (EDLP) keeps the cost structure low.
According to a 2013 Time article, Walmart was one of the early practitioners of automated restocking orders. As products are purchased in stores, Walmart’s systems automatically calculate orders to its vendors. Delivery trucks take the most efficient routes to save time and fuel.
The retail industry is a difficult business, but there’s no doubt that Walmart beats their competition. The company’s operating margin in FY 2014 was 5.64%, compared to the industry average of 2.8%. Still, since margins in the retail business are low, there is little room to handle a large decline in revenue.
Low Cash Burn: Does the company have enough cash to last several years, even if it loses money?
Walmart has been gradually increasing its total current assets, which recorded at $61,185 million in FY 2014. Its free cash flow for the trailing 12 months is $13,555 million, which has been increasing over the long term.
Walmart can likely handle a period of losing money due to its free cash flow.
Are insiders selling?
Yes, according to GuruFocus insider data, the most recent insider sell was on Nov. 25, 2014 when Executive Vice President Rosalind Brewer sold 7,000 shares. The most recent insider buy was on Nov. 19, 2010.
Is the company buying back shares?
Walmart currently has a $15 billion share repurchase program with no expiration date or restrictions on the period that the company can buy back shares, according to the 10-Q filing. In the nine months ended Oct. 31, 2014, Walmart repurchased 13.4 million shares at an average price of $75.82 per share. This is a large decline from the previous year when Walmart repurchased 77.9 million shares in the nine months ended Oct. 31, 2013.
Walmart’s final score is 3.6/5.
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