With the U.S. economy being consumption driven, Walmart (WMT, Financial) has always been in the news, and the company has created immense shareholder value. Even for the future, consumption will continue to drive growth in the U.S., and there are several long-term reasons to be positive on Walmart.
However, in the next few months, I would prefer to be cautious on the stock.
I would start with some macroeconomic developments, and the GDPNow indicator, which provides good estimates on likely GDP growth, is the first reason to remain cautious on Walmart. As of March 10, the GDPNow indicator was showing that the U.S. economy was likely to grow at 2.3% for the first quarter. However, in the next three weeks, growth estimates were revised sharply downward and for March 28, the GDPNow indicator was pointing to sluggish first-quarter GDP growth of 0.6%.
With GDP growth driven by consumption, I expect first-quarter personal consumption expenditures to disappoint. In line with this view, I also expect Walmart to report muted first-quarter numbers, and this is likely to translate into some near-term downside for the stock.
The second major concern is a potential increase in the minimum wage across the U.S. Walmart has already increased minimum wages to $10 per hour, and this factor is discounted in the stock from a margin compression perspective. However, California recently reached a deal to increase minimum wages to $15 per hour; if other states follow, there can be more downside for Walmart. I would wait for more clarity on this issue before considering exposure to the stock.
While these two factors are concerns for the foreseeable future, there are positives that can potentially offset them. Walmart was significantly impacted by a strong dollar in fiscal year 2015 and if the dollar remains strong, earnings are likely to be impacted.
However, with the global economy slowing, Janet Yellen has indicated that there can be a potential delay in a rate hike and that the Fed is prepared to cut rates again if the situation demands. This statement has helped the dollar trend lower and if weakness in the dollar sustains on anemic U.S. growth, I expect Walmart to benefit in the coming quarters.
Walmart’s low beta and healthy dividend of $2 per share are reasons for considering exposure to the stock in the medium to long-term. With increased rewards through share buyback and dividends, Walmart will continue to create value for shareholders.
Further, I am also bullish on the company’s ecommerce segment with a long-term horizon. In the foreseeable future, contribution from the ecommerce segment is likely to be small, but Walmart has made significant investments in the initiative and is likely to deliver results in the long term.
Walmart has trended higher recently, and some correction is entirely likely considering the expectation that first-quarter GDP growth will be sluggish. However, if the stock corrects by 10%, it would be a good medium- to long-term buying opportunity.
Diusclosure: No positions in the stock.
