Wednesday, 14 October 2015

Interesting times at Wal-Mart

Well...today is an interesting day for Wal-Mart shareholders.  I have written about the company a number of times but have never bought the stock.  Given today's move...


...which if this magnitude happens would be the biggest one day fall since 1988...


(h/t @fastFT)

...that was possibly a wise move. So what was said?  Here are a few headlines: 
  • Shares of $WMT gyrate after comments from shareholders meeting; CFO says expects flat sales in FY16
  • $WMT saying FY17 EPS will fall 6-12% driven by increased spending on wages
  • Wal-Mart CFO: Sales now expected to be flat in fiscal 2016.
  • Wal-Mart CEO says investments in tech and people will continue to pressure earnings next year


Well that's not...great.  As I have chronicled over a number of articles (the most recent here) revenue growth has been on a structural growth rate decline for a while.


As I noted back in August in the above piece when I reviewed the status of the company and its turnaround plans and pulled it together into some valuation thoughts:  

'We are getting closer to value but for me the continued deterioration of the earnings line has pulled that number further down.  A 5% free cash flow yield on Wal-Mart is around US$65/share, a single digit EV/ebit multiple nearer US$60.  The three year chart may shout support but my instinct is that it is still too early in an industry which is still volatile/seeing change and competition'.  

Clearly that single digit EV/ebit multiple is going to be lower now, at the very least below US$55 a share, a price approaching the lowest bound of the 5 year range: 


The important question however is to ask whether this is deeply structural with Wal-Mart. Tesco's after all in the UK as the market behemoth who lost their mojo as more customers wanted a different experience elsewhere.  Wal-Mart has few issues with discounters but it may be struggling with the lack of real wage growth for its core consumer group and - of course - a commitment to raise the wages of its own workforce as noted above. 

As I detailed in August the turnaround plan is centred on funding extra capex/wages with lower costs and simplification which sounds sensible, certainly with Wal-Mart's strong balance sheet (net debt around x1 historic ebitda).  No surprises that they have announced a US$20bn buyback (just over 10% of the market cap!) then at a certain level. 

Clearly scepticism is going to remain high for a while - and my instinct is to wait for this prospective single digit EV/ebit level again, which suggests around a US$55 entry price statically. The buyback and 3%+ dividend yield (see below) are undoubtedly supports. 


As this piece (from which I took the above dividend chart) correctly observes:

'There is a structural shift happening right underneath WalMart's feet. Consumers, particularly younger consumers, simply don't go to WalMart nearly to the extent their parents and grandparents did.
WalMart has seen its public image suffer greatly as a result. It's about time the company takes these issues seriously and positions itself to better compete in the new age of retail. While the stock has performed very poorly, and may continue to, WalMart may finally be on track for a real turnaround'.
I think capital growth investors wait for US$55 at today's newsflow.  Longer-term income/total return investors cannot really be criticised for giving a sub US$60 level a go so long as they have a 2-3 year minimum holding period in mind. 

Interesting times at Wal-Mart.  

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