Walmart Inc.
The Chart of Walmart’s revenue per share growth shows that revenues per share had grown relatively strongly and steadily over the years, rising a compounded average of 6.4% per year in the ten years but recent years are somewhat. The earnings per share growth was also historically strong until 2013 but thereafter flattened and then declined which was partly due to currency impacts and higher wage and benefit expenses. The adjusted earnings line is close to the GAAP earnings line because few (and relatively small) adjustments have been necessary. The earnings line is well below the revenue line due to the slim net profit margins that are characteristic of retail (2.7% recently in the case of Walmart). Book value per share has grown steadily (although flat lately) averaging 5.4% per year in the period shown and that is despite using cash to buy back 25% of the shares in the past ten fiscal years.
| Wal-Mart (WMT, New York) | |
| RESEARCH SUMMARY | |
| Report Author(s): | InvestorsFriend Inc. Analyst(s) |
| Author(s)’ disclosure of share ownership: | Author(s) do hold shares |
| Based on financials from: | Jan 31 ’17 Y.E + Q3 ’18 |
| Last updated: | 18-Oct-17 |
| Share Price At Date of Last Update: | $86.22 |
| Currency: | $ U.S. |
| Generic Rating (This rating does not consider the circumstances of any individual investor and is therefore not specific advice for any individual): | (lower) Sell rated at $86.22 |
| SUMMARY AND RATING: This cell is a summary of information in other cells of this report. This is a great company with outstanding past growth, albeit with some notable recent weakness (see graph) and with good but perhaps no longer suburb management. The economics of the business are good and it appears to have good long-term predictability although with likely earnings per share growth of about 5 to 6%. It passes most of the Buffett criteria but is arguably too expensive and Buffett gave up on it and sold the great majority of Berkshire’s shares in this company. We like that it has bought back 25% of its shares in the past ten years and done so at reasonably attractive share prices. In particular we like its cost advantages over most competitors which enables its established reputation for value while also delivering a high return on equity. The value ratios in isolation however indicate that the company may be more than fully valued and therefore a Sell. The recent earnings growth trend is definitely negative but some of that was due to the higher U.S. dollar and due to a wage increase. The U.S. same store sales growth is recently modest but improving at around 1.5%. The insider trading signal is moderately negative. Considering the high ROE and the moderately high P/E ratio but also considering that the outlook for growth is moderate is (lower) Sell. It would likely take some catalyst like a sale and leaseback of stores to produce a material gain in the share price in the next year. | |
| DESCRIPTION OF BUSINESS: (Updated from the January 2017 annual report. Wal-Mart operates retail stores in various formats around the world based primarily on being a low cost provider of general merchandise and groceries in (mostly) large format stores. It is the largest retailer in the world and groceries account for more than half of its sales. It is the largest grocer in the Unites States. The company had revenues of $486 billion in fiscal 2017. Total assets were $199 billion and total invested equity was $81 billion. Wal-Mart’s U.S. stores accounted for 40% of the store count, 64% of sales, 70% of operating income and 54% of assets. International accounted for 54% of the store count (but 32% of the square footage), 23% of sales and 23% of operating income and 39% of assets. Sam’s U.S. warehouse clubs accounted for 6% of the store count, 12% of sales 7% of operating income and 7% of assets. (International appears to have lower sales per square foot) Operating in 28 countries including the United States, with 11,695 stores, 1164 million square feet and 2.3 million employees. Outside of North America it uses about 57 different local banner names. Major Countries outside of the Unites States are (in declining order of store count) Mexico, Central America (Guatemala, Costa Rica, El Salvador, Nicaragua and Honduras) United Kingdom, Brazil, China, Canada, Africa (very largely South Africa), Chile, Japan, Argentina and India. No stores in Europe (except the UK) and just twenty in India. It appears from the balance sheet that it owns the great majority of its land and buildings, although it certainly rents a significant number as well. In Mexico, Walmart owns 70% of Walmart de Mexico which trades as a separate company. | |
| ECONOMICS OF THE BUSINESS: The economics of the business seem good based on massive scale and a focus on being a lower cost operation. Walmart has the ability to earn strong profits despite having among the lowest prices. Net profit over sales is modest at 3.0%. This leveraged up to a return of 7.3% on assets because sales are 2.43 times larger than assets. It is further leveraged up to an attractive Return on (ending) equity of 19.0% because the assets are 2.64 times larger than the equity (with accounts payable and accrued liabilities and deferred income taxes providing some of the leverage). | |
| RISKS: See annual report for a more detailed summary of risks. The most significant risks relate to the general economy in the markets Wal-Mart operates and strong competition including from Amazon and Costco. | |
| INSIDER TRADING / INSIDER HOLDING: Checking Yahoo insider trading data for since the start of 2017 through October 18, 2017. The founding Walton family made substantial and regular sales at prices from $70 to $80. Five officers also sold at $76 to $80 (with several different sales in two cases). Considering how many shares the family has it’s not clear that any signal can be taken from those sales. Overall, the insider trading signal is somewhat negative. | |
| WARREN BUFFETT’s CRITERIA: Buffett indicates that all investments must pass four key tests: the business is simple to understand and therefore its earnings are predictable (pass, retail business is easy to understand), has favorable long-term economics due to cost advantages or superior brand power (pass, a lower cost retailer although now facing stiffer competition from Amazon), apparently able and trustworthy management (pass), a sensible price – below its intrinsic value (fail or marginal pass at best), Other criteria that have been attributed to Buffett include: a low debt ratio (pass with debt at 57% of equity and 17% of the market value of the equity), good recent profit history (fail), little chance of permanent loss of the investors capital (pass) a low level of maintenance type capital spending required to maintain existing operations excluding growth (marginal pass as stores require renewal). | |
| MOST RECENT EARNINGS TREND: Adjusted earnings in the past four quarters starting with the most recent (Q2 of fiscal 2018 ended July 31, 2017) Fell 9%, rose 2%, fell 9% and fell 5%. Revenues per share in the same four quarters rose 5%, rose 5%, rose 5% and rose 4%. Recent earnings were depressed by the higher U.S. dollar and by a relatively large hourly wage increase. Recent revenues were depressed by the higher U.S. dollar and by lower gasoline prices. Recent per share figured were boosted by share buy-backs, which is a legitimate way to grow. Fiscal 2017 (ended January 2017) adjusted earnings per share were down 5% and revenues per share were up 4%. Fiscal 2016 (ended January 2016) adjusted earnings per share were down 10% and revenues per share were flat. Fiscal 2015 (ended January 2015) adjusted earnings per share were down 2% and revenues per share were up 3% Fiscal 2014 adjusted earnings per share were up 3% and revenues per share were up 5%. Overall the recent earnings trend is quite negative despite a boost from share buy backs. In part this was due to foreign currency impacts. The negative currency impacts will likely soon come to an end as currencies do not travel in one direction indefinitely. | |
| COMPARABLE STORE SALES: These are for Walmart U.S. (which excludes Sam’s Club) which represents about 62% of revenue and 73% of operating income. In the past four quarters starting with the most recent quarter (Q2 2018 ended July 31, 2017) same-store sales growth was 1.8%, 1.4%, 1.8% and 1.2%. The fiscal 2017 increase was 1.4%, Fiscal 2016 was 1.1%, Fiscal 2015 was 0.5%, Fiscal 2014, minus 0.6%, Fiscal 2013 up 1.8%. Fiscal 2012 overall up 0.3%. Fiscal 2011 overall was down 1.5%. Overall, the U.S. same-store sales growth is quite modest but positive. Numbers for the much smaller Sam’s Club were (without fuel) in these same four most recent quarters 1.2%, 1.6%, 2.4% and 1.4%.Fiscal 2017 was 1.1%, Fiscal 2016 was 0.4% Fiscal 2015 was up 0.5%. Fiscal 2014 was op 0.7%, Fiscal 2013 3.6% and 2012 was 5.1%. Overall, recent same-store sales have been positive but quite modest. | |
| Earnings Growth Scenario and Justifiable P/E: This assumes we require a 6.5% return. With its recent 47% dividend payout ratios, we can justify paying a P/E of 15 assuming growth of 3.5% for the next ten years followed by long-term 3% growth and a 50% pay-out ratio. The justifiable P/E ratio is very heavily dependent upon the required return which is in turn heavily dependent on long term interest rates and inflation. | |
| VALUE RATIOS: Analysed at a price of $86.22. The price to earnings ratio (And there were only very minor adjustments to earnings) is unattractive (given the 17% ROE but low growth) at 20.3. And the P/E based on managements earnings forecast for the full fiscal 2018 is similar at 19.8. The price to book value ratio appears somewhat unattractively high (in isolation) at 3.4 but mathematically simply reflects the high ROE and the P/E. And there is significant land and buildings for which the market value undoubtedly greatly exceeds book value. The ROE of 17% is very attractive. The dividend yield is modest for this mature company at 2.4%. Our more conservative (possibly pessimistic) intrinsic value calculation is $53 based on five-year EPS growth of 2% annually and a terminal P/E of 13 our more optimistic calculation is $72 based on 6% annual growth and a terminal P/E of 15. With this 6% growth and a terminal P/E unchanged at 20 the calculated value is $93. These intrinsic value calculations assume a required return of 6.5% given low interest rates. Adjusted earnings per share growth over the last five fiscal years averaged only 0.7% driven by recent declines and sales per share growth averaged 3.9%. Overall the value ratios, in isolation, would seem to support a rating of Sell. | |
| SUPPORTING RESEARCH AND ANALYSIS | |
| Symbol and Exchange: | WMT, New York |
| Currency: | $ U.S. |
| Contact: | 479-277-1498 |
| Web-site: | www.Walmart.com |
| INCOME AND PRICE / EARNINGS RATIO ANALYSIS | |
| Latest four quarters annual sales $ millions: | $490,012.0 |
| Latest four quarters annual earnings $ millions: | $12,729.0 |
| P/E ratio based on latest four quarters earnings: | 20.7 |
| Latest four quarters annual earnings, adjusted, $ millions: | $13,011.4 |
| BASIS OR SOURCE OF ADJUSTED EARNINGS: In Q2 2017 deducted a 14 cents per share gain. In fiscal 2014 added back a charge of 26 cents per share. In fiscal 2012 deducted $68 million pre-tax gain on a building sale. In fiscal 2011, we deducted a $191 million tax gain identified by management. Fiscal 2010 deducted a net of $308 million for tax benefits, sale of subsidiaries minus certain restructuring charges. Total adjustments in fiscal 2009 amount to adding back a net of $211.2 million. Adjustments for fiscal 2008 after tax was $188.4 million deducted. Net of tax adjustments for fiscal 2007 was $894 million added back. It can be seen on the graph that these adjustments were relatively small versus Walmart’s net income. | |
| Quality of Earnings Measurement and Persistence: Earnings are relatively stable but showing a modest decline. In part this was due to the higher UI.S. dollar. The earnings measurement is very straight forward with cash sales and cash payments to suppliers there is little in the way of deferrals or amortization of any “soft costs”. | |
| P/E ratio based on latest four quarters earnings, adjusted | 20.3 |
| Latest fiscal year annual earnings: | $13,643.0 |
| P/E ratio based on latest fiscal year earnings: | 19.3 |
| Fiscal earnings adjusted: | $13,456.3 |
| P/E ratio for fiscal earnings adjusted: | 19.6 |
| Latest four quarters profit as percent of sales | 2.7% |
| Dividend Yield: | 2.4% |
| Price / Sales Ratio | 0.54 |
| BALANCE SHEET ITEMS | |
| Price to (diluted) book value ratio: | 3.41 |
| Balance Sheet: (as of Q2, fiscal 2018) Assets are composed as follows: 54% are property and equipment (of which 23% is land and most of the remainder is land and buildings while another large component is store fixtures and equipment) a related 4% is capitalised leases, 22% of assets are inventory, 9% is goodwill, 3% is cash and 3% is receivables and 6% is other assets and deferred charges. On the other side of the balance sheet these assets are supported as follows: 38% by common equity, 23% by accounts payable and other short-term payables (which more than finances the inventory an receivables on an interest-free basis), 20% debt, 4% capital leases 5% deferred income taxes and 1% minority equity. This is a very strong balance sheet with solid assets and modest debt. Walmart could easily increase debt to finance additional share buy backs. Almost the entire equity is made up of retained earnings and this is despite substantial dividends paid out and share buy-backs. This attests to its history of profitability. | |
| Quality of Net Assets and Book Value Measurement: The quality of the assets are high, which causes the measurement of the net equity or book value figure to be conservatively stated compared to market value. Current assets are high quality as the major component is inventory that can readily be converted to cash. Land, buildings and improvements are likely worth much more than stated at their cost and would be highly attractive locations to competitors. Intangibles amount to only approximately 11% of total assets. The shares recently traded at 2.8 times book value so it unlikely that the assets would provide much initial protection from a share price decline if the earnings were to drop. | |
| Number of Diluted common shares in millions: | 3,021.0 |
| Controlling Shareholder: (Updated May 2017) The heirs of founder Sam Walton control about 51% of the outstanding shares mostly through Walton Enterprises LLC and the Walton Family Holdings Trust. A Walton family member (by marriage) is chair of the Board. | |
| Market Equity Capitalization (Value) $ millions: | $260,470.6 |
| Percentage of assets supported by common equity: (remainder is debt or other liabilities) | 37.9% |
| Interest-bearing debt as a percentage of common equity | 57% |
| Current assets / current liabilities: | 0.8 |
| Liquidity and capital structure: Strong liquidity with strong operating cash flows and modest debt. Debt is rated double A according to the 2017 annual report. | |
| RETURN ON EQUITY AND ON MARKET VALUE | |
| Latest four quarters adjusted (if applicable) net income return on average equity: | 17.0% |
| Latest fiscal year adjusted (if applicable) net income return on average equity: | 17.0% |
| Adjusted (if applicable) latest four quarters return on market capitalization: | 5.0% |
| GROWTH RATIOS, OUTLOOK and CALCULATED INTRINSIC VALUE PER SHARE | |
| 5 years compounded growth in sales/share | 3.9% |
| Volatility of sales growth per share: | Relatively flat recently |
| 5 Years compounded growth in earnings/share | -0.6% |
| 5 years compounded growth in adjusted earnings per share | 0.7% |
| Volatility of earnings growth: | Modest declines recently |
| Projected current year earnings $millions: | $13,141.4 |
| Management projected price to earnings ratio: | 19.8 |
| Over the last ten years, has this been a truly excellent company exhibiting strong and steady growth in revenues per share and in earnings per share? | Historically yes, but not presently |
| Expected growth in EPS based on adjusted fiscal Return on equity times percent of earnings retained: | 8.9% |
| More conservative estimate of compounded growth in earnings per share over the forecast period: | 2.0% |
| More optimistic estimate of compounded growth in earnings per share over the forecast period: | 6.0% |
| OUTLOOK FOR BUSINESS: Given modest growth in the number of stores of about 2.3% (265/11695) and the share count reductions (recently 1 to 3% per year) and comparable store sales growth in the range of 1.5%, an earnings growth in the range of 6% per year appears feasible. Walmart is projecting fiscal 2019 earnings per share growth of 5%. The company has the ability to make acquisitions and move into more countries if it wishes to. | |
| LONG TERM PREDICTABILITY: It seems safe to predict that Walmart will continue to grow at least modestly over the years for the foreseeable future. Possibly Amazon will impact its sales but it remains to be seen whether online shopping can deliver everyday goods as cheaply as Walmart. | |
| Estimated present value per share: We calculate $53.50 if adjusted earnings per share grow for 5 years at the more conservative rate of 2% (reflecting weak recent growth) and the shares can then be sold at a P/E of 13 and $72.33, if adjusted earnings per share grow at the more optimistic rate of 6.0% for 5 years and the shares can then be sold at a P/E of 15. Both estimates use a 6.5% required rate of return. The estimate rises to $90 with 6% growth and a terminal P/E of 18 and $93 with a terminal P/E of 20. | |
| ADDITIONAL COMMENTS | |
| INDUSTRY ATTRACTIVENESS: (These comments reflect the company within its industry) Michael Porter of Harvard argues that an attractive industry is one where firms are somewhat protected from competition based on the following four tests: 1. Probable barriers to entry (marginal pass, retail is fully open to competition but Walmart’s scale allows it to be one of the lower cost operators making it difficult to compete against). 2. No issues with powerful suppliers (pass). 3. No issues with dependence on powerful customers (pass) 4. limited tendency to compete ruinously on price (marginal pass due to low fixed cost component, but Wal-Mart does try to be the price leader. Overall this industry appears to be at least marginally attractive for Walmart as a low cost operator. | |
| COMPETITIVE ADVANTAGE: Wal-Mart’s huge corporate size and the use of very large stores allows it to be an international lower cost retailer. Purchasing management systems and control over suppliers are class leading. It has a powerful brand name that is associated with value in the minds of North American consumers and increasingly in the minds of people all over the world. It sells its products quickly for cash often before the supplier payments are due. This results in very little investment in inventory by Walmart itself. Walmart achieves a 17.0% return on equity with a gross margin of 25.6%. Smaller stores must use higher markups. Walmart is able to operate profitably with one of the lower gross margins. However Costco operates profitably at a much lower gross margin of 13.4% indicating that Costco is a lower cost operation than Walmart. It is not clear to us if Amazon has a cost advantage once the cost of delivery is factored in, but it may. Amazon chooses to operate with a far lower profit margin which makes it a formidable competitor. | |
| COMPETITIVE POSITION: We don’t have specific figures on Walmart’s share of the general merchandise or grocery markets. We understand it is the largest grocer in America. | |
| RECENT EVENTS: Recent profit has been lowered by the higher U.S. dollar and by increased wages and benefits. There is a recent focus on e-commerce including experiments in online grocery ordering combined with specialized pickup depots. In September 2016 acquired online retailer Jet.com for $2.4 billion which included $1.7 billion in goodwill. In June 2016 sold certain Chinese assets and acquired 5% of JD.com a chines online retailer. In early 2016, closed 150 stores in the U.S. representing about 3% of the store count. Two thirds of these were the small Walmart express stores as it abandoned its smallest store format. About 115 stores were closed internationally including 60 in Brazil and a number in Latin America. | |
| ACCOUNTING AND DISCLOSURE ISSUES: There appears to be full disclosure with no apparent accounting issues. | |
| COMMON SHARE STRUCTURE USED: Normal, 1 vote per share | |
| MANAGEMENT QUALITY: The company appears to be reasonably well managed but not superbly managed. The CEO was promoted from within and started as an hourly employee. Walmart’s simple mission to save people money so they can live better is compelling. It has shown discipline in expanding into relatively few international countries. The share count has decreased by 25% in the past ten years ending with fiscal 2017. We like the focus on increased sales and the fact that management breaks down the impact of currency and new store additions and well as comparable store sales. Management indicates it is focused on cost reduction to maintain it’s low price focus but has not delivered on that. There appears to be a good focus on key performance drivers. A recent focus on customer convenience and speed seems wise. Management indicates that growth is a higher priority than shareholder returns (page 22 2017 annual report) Management also appears to be set to buy back shares without indicating that they are under-valued. | |
| Capital Allocation Skills: Management appears to have made reasonably good choices in investing its capital and in its financing. It has spent heavily on share repurchases at prices that were reasonably attractive. It sharply scaled back share repurchases in 2015 when the stock price rose into the $80 to $90 range, this now seems wise as the shares then fell to $60. Subsequent buys averaging $66 in fiscal 2016 and $69 in d=fiscal 2017 now appear to be good used of capital. It has expanded internationally at a reasonable pace. The dividend payout ratio is about 47%. With a 17% ROE on an equity base that has increased by about 60% in the past ten years there is no indication that capital spending and acquisitions have been unwise. | |
| EXECUTIVE COMPENSATION: Ranged from about $8 million to $20 million for the top five officers for the fiscal year ended January 31, 2017. This is not of concern given the size and profitability of the company (2016 fiscal profit was $14,694 million.) | |
| BOARD OF DIRECTORS: (Updated 2017) Three two Walton family members (one by marriage) are on the 12 member Board. With the President of Wal-Mart also on the Board as well as a former CEO there are 7 members who are (supposedly) independent. The independent directs mostly own 1 to 2 million dollars worth of shares while the chairman who is a former CEO owns $123 million worth. All Board members are highly qualified and accomplished with good representation from large investment funds, good retail experience and also experience in Human resources, academic, accounting and advertising. This appears to a high quality Board who should be capable of thinking like intelligent owners, who have good business knowledge and who are financially capable of acting independently. | |
| Basis and Limitations of Analysis: The following applies to all the companies rated. Conclusions are based largely on achieved earnings, balance sheet strength, earnings growth trend and industry attractiveness. We undertake a relatively detailed analysis of the published financial statements including growth per share trends and our general view of the industry attractiveness and the company’s growth prospects. Despite this diligence our analysis is subject to limitations including the following examples. We have not met with management or discussed the long term earnings growth prospects with management. We have not reviewed all press releases. We typically have no special expertise or knowledge of the industry. | |
| DISCLAIMER: All stock ratings presented are “generic” in nature and do not take into account the unique circumstances and risk tolerance and risk capacity of any individual. The information presented is not a recommendation for any individual to buy or sell any security. The authors are not registered investment advisors and the information presented is not to be considered investment advice to any individual. The reader should consult a registered investment advisor or registered dealer prior to making any investment decision. For ease of writing style the newsletter and articles are often written in the first person. But, legally speaking, all information and opinions are provided by InvestorsFriend Inc. and not by the authors as individuals. The author(s) of this report may have a position, as disclosed in each report. The authors’ positions may subsequently change without notice. | |
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