Does Walmart Deserve All This Buzz?

Retail giant Walmart (WMT) was the talk of the town on Tuesday.

A positive column in last weekend's Barron's and a newly announced $20 billion buyback authorization sent the stock surging to an intraday peak of $84.88. WMT closed north of $84.

What else is getting everybody so worked up about the "new" Walmart?

Last summer, WMT bought Jet.com to hasten and improve its online selling capacity. Walmart plans to take on Amazon (AMZN) by offering free two-day shipping. It also expects to allow expedited, in-store refunds on merchandise bought online. Management projects a 40% increase in internet sales during the coming fiscal year.

WMT's new guidance for next year, though, indicates these actions are not going to help EPS very much. The new estimate for fiscal 2018 says the company might earn only about 5% more than this year's projection for $4.35.

Both years' estimates are well below the $5.11 per share WMT actually posted four years earlier, in fiscal 2013. How can sharply rising revenues not translate into much better profits?

TheStreet's retail guru Brian Sozzi said the obvious regarding Walmart's deeper push into web-based sales: "Money has to be poured into e-commerce, logistics and people."

Everybody wants Amazon-like revenue growth, but nobody wants Amazon-like profit margins.

Amazon sells a lot of stuff but its net profit margins from 2011 through 2016, excluding a 2014 loss, ran from 0.2% to 1.7%. Walmart's margins ranged from 2.8% to 3.6% over that same time frame, according to Value Line.

Perhaps all the current excitement on WMT shares is undeserved.

People who played WMT on momentum early in 2015, near $91, are still far underwater. Those who bought in near 2013's peak, north of $81, are just starting to see positive territory.

Over the past decade, Value Line says Walmart underperformed 80% of its 1,700-company main research universe.

Those who do the math and know Walmart's trading history should be cashing out, or staying away.

Since 2010, Walmart carried an average P/E of just 14.4x, accompanied with about a 2.57% yield. There have been numerous chances to own WMT at well below that normalized level, along with dividends running as high as 3.48%.

The previously noted 2015 peak was the only time during the past decade when WMT commanded a higher multiple than it does today (red-starred below). It was a bad level to get involved.

Assume WMT hits next year's EPS projection. Give it the benefit of the doubt and award it a somewhat above-average 15.5x multiple. The 12- to 16-month goal would be only $71 or so. Why pay $84 when risk outweighs potential reward?

Are you skeptical that Walmart could trade near $70 again?

WMT was available for under $50 during 2011, on EPS of $4.45. Traders could have picked up Walmart at less than $70 during seven of the past eight years, including 2017 year to date.

Standard & Poor's research disagrees. On Sept. 30, its analyst called WMT a strong buy from $78.95. S&P's computer-generated fair value, though, weighed in at just $78.50. They were right over the short run.

Independent research house Morningstar was neutral on WMT before Tuesday's take-off. WMT now fetches more than their fair-value estimate while commanding a higher-than-typical valuation.

Where's the payoff for buying in today?

Upside breakouts get technicians excited. Investors who care about fundamentals, like Walmart shoppers, should hate paying more than everybody else for the same thing.

Caveat emptor with WMT north of $84.

Amazon is a holding in the Trifecta Stocks portfolio. Click here to learn more about this model portfolio and market analysis service.

This commentary originally appeared on Real Money Pro on Oct. 12. Click here to learn about this dynamic market information service for active traders.

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