Walmart (WMT, Financial) is down more than 8% today on the news that the company’s revenue was hit by $15 billion due to strong dollar. The 8% drop in stock prices caused its market cap to drop by about the same amount.
We have been avoiding Walmart stock due to the severe warning sign we have on the stock:
This severe warning sign is the decline of the operating margin of Walmart. Walmart's operating margin has been in a five-year decline. The average rate of decline per year is -1.3%. This severe warning sign is the results of fierce competition from online retailer Amazon (AMZN, Financial) and other discount retailers such as Costco (COST, Financial).
If you are not aware, GuruFocus conducts thorough checkups on the financials and performances of all companies and displays warning signs to premium members whenever we find anything suspicious or dangerous. These warning signs do not necessarily mean you should not invest in the stock. But you should be aware of them before you invest. Further reading: New Feature Announcement: The Warning Signs.
The competition from others has caused the decline of the profit margins and slowing down of its growth. Walmart's operating margin is shown below.
We can see that Walmart's profit margin has shrunk from 6.05% in 2011 to its current 5.6%. Considering its thin profit margins, it is an 8%. A drop in profit margins will cause the earnings growth to be slower than the revenue growth, which is itself struggling.
Is Walmart a buy after this drop? The 8% drop brought Walmart stock to a valuation not seen since 2011. We think it is better to wait until the warning signs are cleared.
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