Walmart Stock Offers Low Risk, Little Reward

Stock (Symbol)

Walmart (WMT)

Stock Price

$119

Sector

Data is as of

Expected to Report

Company Description

Sharek’s Take

Here’s an old timeline of Walmart, from the School of Hard Stocks:

• In 1962, Sam L. Walton and his brother J. L. “Bud” Walton opened the first Wal-Mart store in Rogers, Arkansas.
• By 1967, WMT had grown to 24 stores with annual sales of $12.6 million.
• By 1970, it was a publicly traded company, offering 300,000 shares to the public at $16.50 per share.
• In 1973, Wal-Mart expanded to Tennessee.
• In the early 1970s, shoppers clearly should have seen that the Wal-Mart concept was working: they would drive out of their way to shop at Wal-Mart. The company grew profits at 57% in 1971, then it backed up this growth with 49% growth in 1972 and 33% in 1973.
• An accounting change resulted in only a slight increase in profits in 1974.
• By 1975, it was time for the Wal-Mart train to start rolling again. 1975 profits grew an astounding rate 67%. The company, opening in states one by one, had 125 stores in operation and went through its third two-for-one stock split. By this time, annual profit growth was averaging better than 40% a year.
• By early 1982, it was obvious that Wal-Mart was a leader for the ages. Its ten-year profit growth rate was 39%. Forbes ranked it the number-one general retailer for seven years straight. Even after missing a twenty-fold gain since 1975, new investors would still make 100 times their original investment — had they held on.

Walmart hasn’t had record profits in years. Here’s WMT’s annual profits since 2014: $5.07, $4.57, $4.32, $4.42, $4.91, and $4.93 last year. Investors have appreciated the company’s strength against Amazon and have rewarded WMT with a higher multiple. The stock used to sell for 16x earnings and now it sells for 23x. My Fair Value is 25x profits which is $128 per share. The stock is now $119. That’s just 7% upside in a stock market that’s dropped 30%. There are tons of deals in the market today — stocks with huge upside. With an Estimated Long-Term Growth rate of 6% and a dividend yield of 2% I’m not excited about this stock. In fact, I think it’s cowardly to go low-risk reward at this time. WMT is close to an All-Time high, thus it will likely lead the new Bull Market higher. But the stock doesn’t have enough juice for the Conservative Growth Portfolio.

One Year Chart

The Est. LTG of 6% isn’t high enough for me. I look for a stock to have an Est. LTG + dividend yield of 10% or greater. This is just 8%.

Earnings Table

Annual Profit Estimates declined.

Qtrly profit Estimates declined. Now analysts expect just 2%, 5%, 2% and 5% profit growth the next 4 qtrs. I expect the company to beat the street the next couple of quarters as Americans are stuck at home. And I think Walmart+ will be a HUGE success. But will profits grow 10% from all this? Show me the money.

Fair Value

I do feel management is doing a great job evolving the company into an e-commerce world. But Amazon is doing it so much better.

I’m taking my Fair Value P/E from 23 to 25 this qtr because I like the Walmart+ catalyst. This is a nice safe pick for concerned investors.

Bottom Line

Walmart (WMT) stock bottomed five years ago and has been in an uptrend since. Most recently the investor community has rewarded the stock with a higher multiple (P/E) even though profits haven’t hit record highs since 2014.

I do believe Walmart+ will be a catalyst for the stock, but perhaps not profit growth. It seems to me like Walmart isn’t making profits like Amazon is because Amazon has other ventures — like Amazon Web Services — that have higher profit margins. Unlimited food delivery sounds expensive.

WMT remains on the radar for the Conservative Growth Portfolio. I think there are other stocks with better risk/reward.

Power Rankings

N/A

Aggressive Growth Portfolio

N/A

Conservative Stock Portfolio

N/A