Until Amazon.com, Inc. (NASDAQ: AMZN ) rolled into town, Wal-Mart Stores Inc. (NYSE: WMT ) was the undisputed king of retail. Amidst competition from both Amazon and other department stores, Walmart stock and profits have fallen significantly in recent years. However, it seems that WMT stock may be on the comeback trail.
Same-Store Stats Are Trending Upward
When last quarter's results came out, the market appeared shocked and pleased. Of particular interest to me was that same-store comps were up by 2.7%, which is a perfectly reasonable rate for any retailer. That it was managed by this legacy retailer that is older than most people reading this article is even more impressive.
However, that was the tip of the iceberg. E-commerce sales rose 50%. While I'm annoyed that Walmart management refuses to break out how much that meant in actual revenue, it tells me the purchase of Jet.com has paid off. If you haven't shopped at Jet.com , give it a shot. I have found a good number of items there that are competitive with Amazon's prices and can result in free shipping if I buy enough.
Food for Thought
Another interesting development has been the extent to which Walmart stock has benefited from food items. With comps that broke 6-year records for WMT in that division, we see that shoppers are just fine with combining their purchases with food purchases from a store not formally known for that. Ironically, it helps to partially explain why Whole Foods may have experienced lagging sales. Shoppers don't care about brand. Organic is organic.
Automation Driving WMT Stock
What is even more interesting, however, and what may help WMT stock push higher in the long term, is that Walmart is going to test out fully automated stores. No, I'm not suggesting that Westworld robots will be manning the checkout aisles, but WMT is angling to create stores without cashiers. At first, that may seem insane. Sure, stores have self-checkout scanners now, but imagine trying to check out with gigantic, bulky items and the longer wait times when people don't know what they're doing.
That would be a nightmare. Instead, Walmart is trying something similar to Amazon Go . You choose what you want and, as you walk out, the technology enables the stores to know what you've taken and will bill you for it via credit card. This could save millions in labor cost.
Bottom Line on WMT Stock
WMT stock has been doing much better of late, reaching all-time highs, but its underlying financials could use some improvement. Let's not get too optimistic. In fiscal year 2015, net income was $16.4 billion. That fell 10% to $14.7 billion in FY16, and 7% to $13.6 billion in FY17. Over the trailing twelve months, however, net income is down to $11.5 billion.
I am not terribly comfortable buying WMT stock at 26 times TTM earnings when earnings aren't growing. I c certainly have no reason to pay that price for a measly 2% dividend, either.
Sure, cash flow is terrific, and $21 billion in free cash flow in FY16 was more than enough to fund that $6.7 billion in dividends. However, WMT stock is far too expensive for management to be buying back stock. I'd rather see another $1 or $2 per share added to the dividend, boosting the yield as high as 4%.
Even then, 26x is too pricey, but at least it gets us going in the right direction.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 23 years' experience in the stock market, and has written more than 1,800 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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