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Jonathan Poland
Jonathan Poland
Articles (481)  | Author's Website |

The Case for Walmart

The world's largest retailer has positioned itself for accelerated growth

July 12, 2018 | About:

Yesterday, a trader on CNBC labeled Walmart (NYSE:WMT) “dead money” and immediately I thought about buying.

Remember when Microsoft was dead money? That was in 2011 and 2012 after 10 years of stagnate market pricing with the stock trading at $28. Of course, just six years later and the stock is up close to 300%. The same thing could happen with Walmart’s stock.

Walmart is the largest retailer in the world with more than $500 billion in annual revenue across 11,700 stores. In 2016, Walmart bought Jet.com and has taken a controlling stake in FlipKart, India’s largest ecommerce store. Each of these transactions is an attempt to better compete with Amazon.com, which Walmart desperately needs to do. The $16 billion Flipkart deal is actually just the thing it needs to do that.

Unfortunately, the deal sparked a lot of backlash in India with citizens concerned that Walmart will put mom and pop shops out of business. This is one area where Amazon crushes retailers by allowing suppliers to compete in a rather open market on its ecommerce platform, thus giving mom and pops the ability to still operate. It would be good to see Walmart build a better ecommerce site to do this, even if it meant competing with its own stores.

Truth be told, Walmart doesn’t need to make acquisitions, it really just needs to add more value to the millions of people who already depend on it for the lowest prices anywhere. The company is already entrenched in local neighborhoods around the U.S.

In fact, Amazon bought Whole Foods to compete with Walmart, which already owns the largest grocery store chain accounting for 60% of the firm’s sales. Remember that Walmart is ultra-efficient with approximately $430 in sales per square foot, significantly higher than rival Target’s $290.

As far as size goes, Walmart no longer dwarfs Amazon on the sales front. Ten years ago, when Amazon was generating just $20 billion in sales, Walmart was doing 20 times more on the top line, pushing over $13 billion to the bottom line. Today, Amazon trails Walmart 2.5x and is 3.75x more valuable. However, Walmart hasn’t stopped growing, adding an additional $100 billion a year in revenue, which should not be overlooked. More importantly, now that Amazon accounts for nearly 50% of the entire pile of cash spent online in the U.S., they are the target.

While Amazon did $120 billion in online retail business during the last year, Walmart’s ecommerce business was barely 5% ($23 billion) of the company’s total output. Why is Amazon getting the pass for being the large incumbent where Walmart isn’t? Because everyone thinks that brick-and-mortar retail is dead. It is most certainly not.

Walmart’s ecommerce segment had another quarter of stellar growth (33%) thanks to Walmart.com and online grocery. Its redesigned website and apps were recently launched and a new store page will allow customers to shop a broader selection of premium brands.

The adjustment to online has been a long one, but the latest quarter marked a 12th in a row that the company reduced in-store inventory, helping efficiency and margins. A higher starting hourly wage rate came into effect in February, but don’t worry investors, robots are coming to replace low-paid workers. And, whether that’s good or bad for society, it’ll benefit Walmart immensely.

Going forward, the company is rolling out grocery pickup or delivery that will help push ecommerce sales above $30 billion for the year, maybe higher. Don’t forget about its international presence, which continues to grow at a 5% clip, and its Sam’s Club warehouse that grew at 3.5% last quarter. Is Amazon going to grow its retail business that fast once every other retailer starts to finally compete in the space? Doubtful.

As for the stock’s valuation, if Walmart earns what analysts expect in 2019 -- $5 per share -- then at its current multiple (29x) the stock would move up to roughly $145, a 67% rise. That would put the market cap above $425 billion, which actually doesn’t seem unreasonable, especially considering that number is still less than what it generates a year in revenue.

Disclosure: I have no positions in any stock mentioned in this article, but may buy Walmart in the next 72 hours.

About the author:

Jonathan Poland
Thanks for reading. Do your own analysis before investing. Good Luck.

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