Walmart de Mexico SAB de CV (MEX:WALMEX, Financial)(WMMVY), the 697 billion Mexican pesos ($3.48 billion) retailer, reported its fourth-quarter and full-year fiscal 2016 results a couple of weeks ago.
In 2016, the Mexican retailer delivered 12% sales growth to 532.4 billion pesos compared to its 2015 operations. Walmart de Mexico also saw its profits rise by 26% to 33.4 billion pesos – a 6.3% profit margin compared to 5.5% in 2015.
As observed, Walmart de Mexico recorded a 4.8 billion pesos profit after it sold its Suburbia stake. Removing one-time probable gains, including last year’s 2.9 billion pesos from selling Banco Walmart among others, Walmart de Mexico still exhibited a strong and healthy 21.6% consolidated net income growth (2).
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“We have delivered a solid quarter –Â not only in terms of sales but also growing profits faster than sales.
“We are committed to maintaining our operational discipline and to investing strategically in order to position our business for the future.
“On Aug. 10, the company announced that we had reached a definitive agreement for the sale of Suburbia to El Puerto de Liverpool, SAB de CV. The closing of this transaction is still subject to approval by the regulatory authorities.
“The assets and liabilities related to the sale of Suburbia are presented as assets and liabilities held for sale in the Consolidated Statements of Financial Position and the results of Suburbia operations are presented as discontinued operations in the Consolidated Income Statements.” – WALMEX Management Commentary
Guidance
Walmart de Mexico expects its sales to double in 10 years' time (2027) and to grow earning(s) at a faster pace than sales by leveraging expenses. Walmart de Mexico expects that its sales growth will come from same-store sales, sales from new stores and e-commerce.
Valuations
Walmart de Mexico currently trades at a slight discount to its peers. According to Reuters data, Walmart de Mexico had a trailing price-earnings (P/E) ratio of 24.4 times (industry figure 25.2), price-book (P/B) ratio of 4.2 times (industry figure 6.1) and price-sales (P/S) ratio of 1.3 times (industry figure 1.1).
The Mexican retailer also had a trailing dividend yield of 4.04% with a 64.1% payout ratio.
Total return
Walmart de Mexico ADR shares have outperformed the broader Standard & Poor's 500 index year to date. According to Morningstar data, Walmart de Mexico had a total return of 9.5% year to date compared to S&P 500’s 6.2%. The retailer, meanwhile, delivered poorly for its long-term shareholders having a 5.4% total loss in the past five years compared to the index’s 14%.
(Annual Report)
Walmart de Mexico SAB de CV
Walmart de Mexico SAB de CV has been undergoing several decades of transformation since its founding in 1958. The company has had several business names changes prior to its recent, including Superama, Midco SA, Aurrera SA, Cifra, SA de CV, Walmart de Mexico SA de CV and finally Walmart de Mexico SAB. de CV in 2006.
In review, U.S. retailer giant Walmart (WMT, Financial) came into the picture in 1991 when it had formed a joint venture with then Cifra, S.A. de C.V. in opening Sam's Club in Mexico with 50%-50% ownership agreement.
In 1992, Walmart Supercenter initiated its operations.
In 1997, Walmart acquired control of the publicly listed Cifra. In 2007, Walmart Bank began its operations. In 2009, Walmart de Mexico acquired Walmart Centroamerica's operation. The latter was the leading retailer in Central America regions Guatemala, El Salvador, Honduras, Nicaragua and Costa Rica. In 2013, Walmart de Mexico launched its Walmart.com.mx.
In 2014, Walmart de Mexico sold its restaurant division – Vips, El Porton, Ragazzi and La Finca – for 8.2 billion pesos, and in 2015, the retailer sold its Banco Walmart de Mexico Adelante, S.A. for 3.6 billion pesos.
The U.S.-based Walmart Stores owned 70.31% Walmart de Mexico shares through a Mexican company, Intersalt S. de RL de CV as of 2015.
As of December 2016, Walmart de Mexico had 3,022 stores in both Mexico – representing 76% of total stores – and Central America.
In Mexico, Walmart de Mexico stores consist of Bodegas Aurrera (Bodegas, Mi Bodegas and Bodegas Express), Walmarts, Sam's Clubs, Superamas and Medimart Pharmacies. In Central America, Walmart de Mexico stores consist of Discount Stores, Supermarkets, Walmarts and Bodegas.
Walmart de Mexico identified its segments through geographical location: Mexico and Central America.
Mexico
Mexico contributed 81% of total Walmart de Mexico sales in 2016. Mexico sales grew by 9%--on constant currency basis – in 2016 to 433 billion pesos, up from 397 billion pesos in 2015. The segment also delivered earnings before tax margin of 8% compared to 7% the year prior.
Central America
Sales in Central America grew 8.2% on constant currency basis in 2016. The segment also delivered earnings before tax margin of 6% compared to 5% in 2015.
E-commerce
Walmart de Mexico’s e-commerce business delivered strong growth increasing sales by 27% in the full year. According to filings, e-commerce still represented a small part of the retailer’s overall business.
For the recent three fiscal years, Walmart de Mexico had average sales and profit growth and margin of 8%, 16% and 6%.
Cash, debt and book value
As of December, Walmart de Mexico had 28 billion pesos in cash and 13.6 billion pesos in debt, including leases, representing a debt-equity ratio of 0.08 times compared to 0.09 the year earlier (1). The retailer also had 14% of 287.9 billion pesos assets in intangibles.
For the period, Walmart de Mexico had a book value of 167 billion pesos compared to 151.8 billion in 2015.
Cash flow
(Results, Walmart de Mexico)
In 2016, Walmart de Mexico cash flow from operation grew 20.5% to 47 billion pesos from the year prior. As observed, a good amount of cash flow came in from Walmart de Mexico’s depreciation and amortization activities, discontinued operations and accounts payables.
Capital expenditures were 14.3 billion pesos leaving Walmart de Mexico with 32.6 billion pesos compared to 26.4 billion pesos the year prior. Walmart de Mexico used 89% or 29 billion pesos of its free cash flow to hand out dividends to its shareholders compared to having allocated 105% of it in the recent three years.
The retailer also did not repurchase any of its shares for the first time in 2016 compared to its past decade continuous annual share repurchase activities.
Walmart de Mexico also paid 1.6 billion in finance leases compared to 1.6 billion payments last year.
Conclusion
Walmart de Mexico ADR shares have an attractive dividend yield while having modestly traded valuations. The Mexican retailer also exhibited an impressive balance sheet having minimal debt compared to its assets. To repeat, the company also has a unique dominant business exposure to the consumers in Mexico and Central America.
(Walmart de Mexico ADR shares and P/E ratio, GuruFocus)
According to Financial Times data, the two analysts that cover Walmart de Mexico ADR shares have a median target price of $23.2 a share – a near 17% upside from its current share price of $19.86.
Local Walmart de Mexico shares had an average median price target of 44 pesos a share – a 13% upside. Applying the locally traded shares’ three-year earnings multiple, profit growth and asking a 30% margin would indicate a 40 pesos share price.
In summary, Walmart de Mexico local and ADR shares would be a hold having a midsingle-digit percentage upside.
Notes
- Morningstar data.
- Me: Consolidated net income excluding other comprehensive income items and actuarial gain or loss related to employee benefits.
Disclosure: I am long Walmart.
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