Walmart Update October 19, 2017

Walmart is updated and rated (lower) Sell at $86.22. (Yesterday’s closing price, today it closed at $86.40) As always, the report gives the rationale for the rating. Under the rating system that I have always used a (lower) Sell is between a Sell rating and a Weak Sell/ Hold rating. To be clear, if I owned it, I would sell.

Walmart has risen 25% this year. I thought it looked overvalued at the start of the year. (I was not alone in that view;Warren Buffett sold almost all of Berkshire’s Walmart stock in early 2017 or late 2016.) Walmart’s revenues are up about 5% per share in the past year but earnings per share are down. To some extent, the stock has risen to share buybacks. I am a fan of share buybacks  if done at a reasonable share price but in this case it has not so far been enough to push earnings per share up and the share price may be too high now for buy backs to make sense. It looks like the share price is already pricing in a good improvement in 2018. Yet management is only projecting an earnings per share gain of 5% in the fiscal year that starts on February 1, 2018.

Management indicates that they want to lower costs and get back some of Walmart’s traditional reputation as the low-cost leader. But they seem to be having trouble getting that done. My impression is that management is not hungry enough to push this huge company to grow earnings at a faster rate. The founding and still controlling Walton family is rich beyond comprehension (easily the richest family in the U.S.A, collectively far richer than Buffett and Gates) and is unlikely to push management hard. And then there is the matter of competing against Amazon which may or may not have lower costs but which is definitely content to make far lower gross profits on sales.