Walmart (WMT) reported earnings this morning and the stock is trading up over $2.00 on the news. For a full copy of press release, click here. The company reported EPS from continuing operations of $4.38 ($0.06 above expectation) for the full year and $1.22 ($0.07 below expectations) for Q4. There is no doubt, that conventional bricks and mortar retail are in a tough environment. While revenue rose in Q4-2016 vs Q4-2015, operating income fell.
The company provided guidance for the fiscal year 2018 in the $4.20 to $4.40, in line with street expectations. At $71.22, this represents a PE of valuation of about 16.6 a 20% discount to the median stock in the S&P 500. Given the competitive challenges facing the industry (slow economy), the changes in consumer shopping habits (more online shopping), we believe the company’s estimate of comparable same-store sales growth of just over 1% for the enterprise is reasonable. The no growth scenario projected by management is also consistent with our view. As a result, we think the company is fairly valued and possibly a little cheap. The wild cards to valuation and financial performance are the much-discussed changes in tax and trade policy that will certainly impact the company’s operations. WMT is a big importer of goods and the border adjustment tax has us concerned, mostly because we do not know what it will look like. A cut in corporate tax rates will certainly be a plus, but the new administration has not released any details on that either.
We have not had a compelling trading idea for WMT stock or its options lately, principally because of the industry challenges, lack of identifiable catalysts, and a trendless share price action. Under these circumstances, we often like to sell cash covered puts or put spreads, particularly on companies that have modest debt relative to enterprise value. However, with realized volatility of approximately 16% and an implied volatility (the price of options) just a few point higher, we think the risk-reward tradeoff is still insufficient. A negative industry surprise could take the stock down into the $50s. An economic rebound could push it up into the low 80s. We put even odds on both scenarios.
In the final analysis, if you own the stock as a core holding, we like the company and think it is ok to hold on. The company is a big cash flow generator and they repurchased about 7% of their market capitalization last year. Future share repurchases will certainly help the share price and EPS going forward. Is it enough to push the share price higher? Only time will tell. We do not have a position at this time and we are waiting for more data to determine if and when a compelling opportunity presents itself.
