Global retail behemoth Walmart (WMT) is currently a selection of GuruFocus’ Historical Low P/S Companies Screener. Shares are trading close to a ten-year low despite the strong performance of the company’s stock.
Since its IPO however, Walmart’s stock has seen a continual rerating of its shares as revenue growth slows.
It does look like the P/S valuation has reached a trough level based on lower revenue growth expectations moving forward. Shares have traded roughly between 0.5-0.6 P/S over the past five years.
The business
Operations comprise three segments: Walmart U.S., Walmart International and Sam's Club. The company operates stores in U.S., Africa, Argentina, Brazil, Canada, Central America, Chile, China, India, Japan, Mexico and the United Kingdom.
It may be surprising, but Wal-Mart is primarily a grocery store when looking at the sales breakdown. In addition, the company is reshuffling management positions as it eyes making a fresh food a top priority at the company. The development follows news from earlier this month that Target is giving fresh and healthy food a larger presence in store aisles at the expense of some packaged food brands. Wal-Mart is also testing an online grocery order pickup service in some markets to keep an edge on Target and Costco.
Growth Strategy
Smaller-Format Stores:
WMT recently opened 165 traditional format Neighborhood Markets and 68 smaller Neighborhood Markets. The neighborhood market format was introduced a year ago, targeting customers in closer communities with convenient access to grocery shopping, daily use food items and health-related items.
The company plans to open 180 to 200 Neighborhood Markets, out of which 10 to 15 will be based on a smaller format. The smaller format will help the company expand its footprint in smaller locations, which in turn helps the company cater to the needs of the surrounding population
Risks
As a global retailer to a broad range of consumers, the company’s risks are primarily exposed to macro-economic risks. From their 10-K:
- General or macro-economic factors, both domestically and internationally, may materially adversely affect our financial performance.
- We may not timely identify or effectively respond to consumer trends or preferences, whether involving physical retail, digital retail or a combination of both retail offerings, which could negatively affect our relationship with our customers, the demand for our products and services, and our market share.
- Fluctuations in foreign exchange rates may adversely affect our financial performance and our reported results of operations.
As can be expected, WMT revenues have only struggled during times of macro-economic pain. When compared to GDP growth, WMT’s sales typically slowed when GDP also experienced a deceleration.
With its domestic U.S. market fairly penetrated however, future revenue growth should be dependent on growing same-store-sales through their renovation plans, and more importantly, growing internationally.
Dividend
Over the past ten years, management has shown a consistent willingness to boost the dividend payout and reduce share-count through buybacks. Over the previous decade, WMT has reduced its share-count by ~25% and doubled its dividend yield.
Ownership
Predictably, WMT shares have a very high institutional ownership rate.
Additionally, management (apart from the founding family) has a higher insider ownership rate than main peers.
Valuation
While WMT is trading near its 10-year lows on a P/S basis, other relative metrics also make the shares look appealing. WMT is currently trading more cheaply on a P/E basis than any relevant competitor. While it’s typically traded within the range of close comps Kroger (KR) and Target (TGT), WMT shares are now trading at a healthy discount.
Moving forward however, management only expects 2.5-3.5% annual growth from brick-and-mortar stores. It's ecommerce segment, while growing faster, is still unprofitable.
Even at an 8% discount rate (reasonable, given the company’s dominant market position and stability), WMT would need to grow EPS by ~6% annually for the shares to be attractive. While this is lower than historical rates, they will need to have additional growth drivers aside from their existing store base to achieve this target.
For more investment ideas like this one, see GuruFocus’ GuruFocus’ Historical Low P/S Companies Screener or the rest of R. Vanzo’s Articles.
