Is Wal-Mart Stock Now Fully Valued?

  • WalMart stock has already delivered a gain of nearly $10/share to those who bought in January.
  • The stock is facing headwinds at its current price of $70, as it seeks to incorporate e-commerce into stores.
  • You can get a nice yield while you wait for these plans to materialize.

After rising smartly at the start of the year, while rivals like Amazon.com (NSDQ:AMZN) were stalled out, Wal-Mart Stores, Inc. (NYSE:WMT) now looks becalmed.

The company was undervalued at $60/share, but after its move to near $70 it encountered resistance and is only now getting back to $69.

WMT stock chart

Source: Wal-Mart stock price chart by amigobulls.com

After experimenting with smaller store formats, CEO Doug McMillon has returned to the original big box idea, trying to execute better by integrating e-commerce into the stores. I experienced this recently. I ordered a product online for in-store pick-up, on short notice, and was able to join a manager in identifying the exact shelf where the product was located. Clerks are also deployed to pick products ordered online and have those orders waiting at the store front.

This is a very, very difficult thing to do. It's one thing to know where 100 units of something may be located. It's quite another to reliably find just one. Shoppers tend to pick things up and move them around. Stocking has to be a constant process. Clerks have to be re-trained, they can't just be drones. That, and tightening labor markets, caused the company to recently announce a minimum wage hike to $9/hour, $10 after training. As the reliability of the new model increases, so should e-commerce revenues.

WalMart is also determined to grow its international business, and reportedly has $76 billion in profits stashed outside the U.S. in order to fund that. Those profits will look thin as long as the dollar remains strong, but any weakening in the dollar could cause reported profits to jump substantially.

Is the long-term plan worth a premium Price/Earnings multiple? No. The most recently announced quarter, covering Christmas and ending in January, showed sales off by $1.8 billion from the same period a year earlier, but only to $129.7 billion. However, net margins remained at a healthy 3.5%, meaning $4.5 billion in net income flowed to the bottom line, or $1.44 per share. This was more than enough to cover the quarterly dividend of 49 cents.

Given the continuing low cost of money, its current P/E of 15 does not represent a premium to the market. The average S&P Stock is selling at 17.2 times earnings. The dividend yields nearly 3% at current prices, so shareholders are being paid handsomely to wait for the turnaround. And the company continues to buy back shares, more than it's giving out in employee and management options, so the share count is actually going down.

All this makes WalMart a conservative stock for a conservative, income-oriented investor.

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  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
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