Walmart (NYSE:WMT) shares may be a safe investment, but are they a growth investment?
Nick Sundich, July 16, 2024
This week’s international stock deep dive in on Walmart (NYSE:WMT). While most of our Australian readers may not have shopped there, many will have heard about it – even if it is just because they own a small cap that has a deal to sell their product into Walmarts.
Being the company that it is, Walmart is a safer investment than most other stocks. But is it a growth stock – has it got more room to grow? In this article, we address that question.
Who is Walmart (NYSE:WMT)?
Walmart is no ordinary supermarket chain. It is a chain of hypermarkets, operating outlets that offer not just groceries but household items too. Any Australian who has been to one can attest to the fact that it is no Coles or Woolworths.
The company was founded in 1962 with the first store opened in Arkansas by Sam Walton. Prior to this, he owned a Ben Franklin store and successfully turned it around by selling products at lower prices to get higher-volume sales at a lower profit margin.
While most discount stores were in big cities and only offered discounts on small items, Walton set up shops in smaller towns. Other unique traits included that the stores were kept open longer hours than competitors, big parking lots that would be free for consumers to park at. Even getting customers to get the goods themselves and pay at the exit was an innovation at the time.
Despite the cult around the elder Walton, it was a slow expansion story with the company only expanding outside Arkansas in 1968 and only setting up shop on the West and East Coasts in the early 1990s.
Today, Walmart is the world’s largest company by revenue with over US$611bn generated in FY23. For comparison’s sake, Amazon generated just US$514bn, ExxonMobil made $413.7bn, Apple made $394.3bn. And Walmart has held this title for over a decade.
The company employs over 2m people across the world, the bulk of whom are in North America. It has direct outlets or investments in several countries including the UK, China and several countries in Latin America.
Walmart also owns Sam’s Club stores, which are like regular outlets but are for specific members only. The company’s shares are up over 60% in the last 5 years.
The past was good, but what about the future?
In the shorter term, Walmart is battling inflation, and winning for the most part. Its profit for FY24 (the 12 months to January 31 2024) came in at $15.5bn, up 33% from FY24, while revenues increased 6% to $642.6bn. It made a 6.6% Return on Assets and 15% Return on Investment. For FY25, Walmart is expecting 3-4% sales growth and its profit to grow 10-16%. Consensus estimates are more optimistic expecting $672.7bn in sales (up 4%) and 28% profit growth.
In the medium term, it is battling Amazon in the eCommerce space. Yes, it is behind at the moment, but is gradually catching up. Its eCommerce sales are 13% of its sales and they have continued to grow over 10% in since the pandemic even though many other eCommerce company revenues fell. It crossed $100bn in eCommerce sales for the first time.
Walmart has several advantages over its peers including its logistics and store networks, its cash reserves, the fact that it is a ‘one stop shop’ as well as the mix of goods, both essentials that are purchased regularly and bigger ticket items purchased less frequently but are higher margin for the company. You see, people like to see goods before they buy them. And some may be paranoid about having a package stolen if it is just left at their home – thank goodness there’s Click and Collect.
In late May 2023, it opened its first Market Fulfilment Centre at its home city of Bentonville, Arkansas. These will increase the number of orders the store will be able to fulfil in each and every day.
Walmart is also building its own marketplace of third party sellers, just like one that Amazon has. Walmart has over 100,000 of these sellers and while this is behind Amazon’s 2m sellers, this could be a more important revenue stream going forward. Another way in which Walmart is competing with Amazon is with its Walmart+ membership program. For US$98 per annum (or $13 monthly), you get benefits including free delivery, early access to Black Friday sales, fuel savings and a Paramount+ Essential Plan.
Yet another innovation Walmart is working on is having EV chargers at its stores. It already has 1,300 fast-charging stations and plans to keep expanding the network.
Our valuation of Walmart
Over the next decade, consensus estimates expect the company to increase revenues by over 40% (an average of 4%) per annum and its earnings per share to double. There are 35 analysts who have a mean target price of $71.90, with estimates ranging between $52 and $81.
On a relative basis, using a basket of peers with an average forward P/E of 21.8x, Walmart appears overvalued as it traded at 27.8x. But, you could argue it deserves a premium over its peers given its market position. Its closest competitor Costco (NDQ:COST) only makes half the revenue that it does. On a DCF basis, we have a price of US$62.58, a 8% downside to the current share price. This is using consensus estimates and a WACC of 8.8%. So this suggests the company is overvalued, and its 30% spike in the past year is because of its recent stock split and better than expected growth.
But there are risks with this company including a worse slowdown in the US economy than has been anticipated so far and supply chain issues taking a turn for the worse. It must also be acknowledged that the company’s margins are not particularly high, below 5%. It has taken some steps such as closing stores in the US with a poor financial performance will help in the short-term. But this is not Australia where Coles and Woolworths have an effective duopoly.
Whether or not you invest in Walmart, it is a company all investors should keep their eye on. This is for two reasons. First, because their competitors will try and follow them. And second, they can provide major hints into consumer behaviour that can be useful for your own investing decisions.
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