Walmart Is Turning Around Right Now

  • Walmart is still trading near multi-year lows, at 40% of sales against 50% for rivals like Costco.
  • Walmart has a turnaround plan in place that will take three years to implement.
  • Give Walmart the same Price/Earnings multiple as McDonald's and this is a $100 stock.

What everyone is looking for, as 2016 opens, is a big but woefully undervalued company in a key sector, implementing positive changes that will set it on a better course for 2016. Companies like Microsoft (NASDAQ:MSFT) and McDonalds (NYSE:MCD) were the ticket last year.

This year, I am betting on Walmart.

After a successful hold of $60/share over the holidays, Walmart is still selling for just 40% of its annual revenue, about $500 billion. Its Price/Earnings ratio of 13.4 is significantly below the market. The finances are in solid shape, with long-term debt representing just 20% of the assets, and SG&A expense is roughly 20% of sales, compared with nearly 30% at Macy's (NYSE:M), often held up as a superior store operator.

Other stores that cater to low-to-middle income shoppers are also showing gains lately. Dollar Tree (NASDAQ:DLTR), which now owns Family Dollar, is up about 4% in the last month, just like Walmart. Dollar General (NYSE:DG), which serves these consumers exclusively, and whose stores are the Walmarts of towns too small for a Walmart, is also doing well.

The progress is possible because unemployment has fallen to 5% and some low income workers, including many at Walmart, are finally earning more money.

Walmart has plans to enter these markets but it will take time to implement. It starts with smaller, grocery store-sized units in cities, to be followed by even smaller units, with gasoline, in those tiny towns between existing SuperCenters. This is what is going to get Walmart the top-line growth it’s seeking. And no one has to notice that Walmart is the second-largest e-tailer around, behind only Amazon (NASDAQ:AMZN).

The pay is still poor, and the sales floor remains class-ridden, with managers living in a separate world from the staff. The company’s attitude towards the communities it serves tends toward the arrogant. But CEO Doug McMillon, who started his Walmart career on the floor while a college student, is slowly changing that. And he doesn’t have to fully accomplish his goals in order for Walmart shares to pop, just as McDonald’s still isn’t Chipotle.

The plain fact is that Walmart grew under Sam Walton as a technology leader, able to track bulk goods from port to store and re-stock shelves quickly. The problem today is different, that of breaking bulk profitably. Once a bottle of shampoo goes on a shelf it becomes much harder to track. Customers move it, or steal it, and if you try to order it from your home, online, it may or may not be there to be picked. If you order one from Amazon.Com you can be certain it is there, in the warehouse.

Narrowing that gap is an enormous challenge, and McMillon says the company is willing to forego profits for the next two years in order to narrow it. If Walmart eliminates two years’ of profit, that’s over $3 billion/quarter going into its technology platforms. Amazon rose to dominate the cloud by spending one-third that amount.

If Walmart were selling at a similar price/sales ratio as Costco (NASDAQ:COST), its market cap would be $250 billion, not $200 billion. If Walmart were selling at the same Price/Earnings multiple as McDonald’s, it would be a $100/share stock.

It will take a few years to get there, but Walmart is finally on the right track.

You can also see Amigobulls' Walmart stock analysis video, for a quick look at all the key financial metrics.

Dana Blankenhorn Dana Blankenhorn   on Amigobulls :
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