Walmart - No Time To Go Shopping (NYSE:WMT) - Seeking Alpha

Joe Raedle

Back in October, I concluded that it was all about the margins in the case of Walmart Inc. (NYSE:WMT). This came as the company saw severe margin pressure in an inflationary environment, as the company was managing a very fluid situation well. That said, to ignite appeal, margins would need to rebound to historical averages, something which I doubt would be achievable in the near to medium term.

Some Perspective

Early in 2021, Walmart posted its 2020 results, a year dominated by the pandemic. Revenues rose 7% to $559 billion, aided by the hoarding effect, with operating earnings up 10% to $22.5 billion, as operating margins of 4.0% came in below the long term average of 5-6%. The resulting earnings power of $5.50 per share could see upside, if the company could boost these margins towards historical averages.

2021 initially was set to become a tough year, but amidst strong growth and the divestment of the underperforming ASDA assets in the UK, it turned out to be a solid year after all. The divestment made that sales rose just 2% to $572 billion, yet operating earnings rose to $26 billion as margins rose to 4.5% of sales and earnings rose a dollar to roughly $6.50 per share. This momentum pushed shares up to a high of $160 in April, working down to a 25 times earnings multiple amidst a low interest rate environment.

Shares fell to the $120 mark as not all was well in 2022. Amidst the impact of higher interest rates, itself the result of higher inflation, the company has been struggling a bit. First quarter sales were up 3% yet quarterly earnings of $1.30 per share came in light, amidst a massive inventory build-up. While the company raised the sales outlook alongside the second quarter results, it was for the wrong reasons, being an increase in inflation.

Subsequently, Walmart cut the full year earnings outlook to $5.80-$5.90 per share. With shares down to $120 over the summer, both earnings estimates and valuation multiples compressed a bit, but shares were not cheap at 21-22 times earnings.

While 2022 was set to being a tougher year, it was based on the expectation of margins sub-4% as a 5% margin achievement could boost earnings by at least a dollar, reducing the 22 times multiple to about 17-18 times earnings.

Remembering that Walmart for years could be bought at a below-market multiple, shares felt too rich for me to get involved around $140 in October.

Steady

Since October, shares actually rallied to the $150 mark in November, before pulling back to $135 in recent weeks, now actually trading at $145 per share. Sales growth accelerated in the third and fourth quarter amidst inflationary impacts.

Full year sales rose nearly 7% to $611 billion despite a $5 billion adverse impact of divestments and some dollar headwinds. The company posted a 5% fall in adjusted operating earnings to $24.7 billion, pushing operating margins down to 4.0% as GAAP operating profits fell to $20 billion and change.

The company posted adjusted earnings of $6.29 per share in the end as the performance was a bit stronger than expected, although that GAAP earnings came in two dollars lower amidst opioid settlements, losses on equity investments and reorganization charges. These adjusted earnings were down seventeen cents from the year before. Net debt was pretty stable around $30 billion, although this excludes financial lease obligations.

For 2024, the company sees sales up 2.5-3.0% in constant currency terms as the company has not quantified how much growth is anticipated from inflation. Adjusted earnings are actually seen down a little to a $5.90-$6.05 per share, mostly because of a $0.20 per share headwind from higher interest expenses, as well as generally inflationary trends.

With EBITDA trending around $35 billion, leverage is far from an issue, but the near term outlook is challenging from a margin perspective. This comes after 2022 margins are down to 4%, and a little more margin pressure is seen this year.

And Now?

I am surprised to see Walmart Inc. shares hold up so well. The company saw a stronger than expected second half of the year in 2022, but 2023 is setting up to be the second year in a row in which earnings per share are seen down. The company now trades around 24 times earnings, with risk-free rates offering a higher rate than the earnings yield here, amidst lackluster (earnings) growth.

If the company can increase margins by a point that adds over $6 billion in operating profits as this could boost earnings to $7.50 per share. If that is achieved, which is a huge if, the multiple only comes down to about 19 times earnings, still a demanding multiple here. Quite frankly, 5% margins look quite demanding, as this is not easy to be achieved.

Increased yields are not really seen from dividends. Even as the company hiked the dividend for the 50th year in a row, the hike is just four pennies to $2.28 per share, translating into a mere 1.6% yield here, at just a third of the Federal Funds rate.

Given the discussion above, I remain more cautious on Walmart Inc. stock than I was last year, although I am fully appreciative of the long-term track record of the business. The reality is that the company has a margin issue in recent years, and it does not look like that we might see a quick reversal of the margin fortunes here.

I might be willing to buy some Walmart Inc. shares at 20 times multiple as long as margins are down at a level around 4% here, as current levels do not look appealing here in my book.

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