At one point in yesterday’s session, share of Walmart (WMT) were up 5% on the day, and up 8% from its 52 week lows made on Friday. The two day gains obviously came off of a very oversold condition, with the stock recently down 38% from its all time highs it made in January. Negative sentiment had hit a fever pitch in retail as stock after stock in the sector blew up, juxtaposed to Amazon (AMZN) seemingly making new highs daily.
On October 14th WMT management guided fiscal 2016 earnings and sales well below expectations, which investors didn’t even bother taking time to digest, sending the shares down 10%, on 10x average daily volume of 80 million. I suspect WMT’s recent reprieve will once again be met with selling as we get through the holiday selling season and it becomes apparent that they will need to spend themselves out of their current sales dilemma to better compete with the likes of AMZN. $50 seems like a reasonable target on the downside in the first half of 2016:
On current consensus eps estimates, WMT trades 14.5x, very near its average over the last 10 years, but at $50, that it would trade about 12x, cheap to its historical average, very near the 10 year low:
This is assuming the company can meet current consensus in a year where the company has guided fiscal 2017 sales to flat vs this year’s $485 million, the lowest sales growth in more than 10 years, and where it appears the ground is quickly moving below the feet of traditional bricks and mortar retailers. To be frank earnings growth is being manufactured, as the company also announced a new $20 billion share repurchase agreement, after retiring the remaining $8.6 billion from their prior program. The company might have better spent a chunk of the last last $8.6 billion on investments in e-commerce and digital initiatives which in their mid Oct investor update the company stated they will spend about $1.1 billion on in fiscal 2017.
Aside from IBM maybe, there are few examples that better exemplify a company that was more focused on managing Wall Street expectations at the detriment to future shareholder value at a time when the foundation of their business model was moving below their feet. For comparison sake, last year Target (TGT) had suspended their buyback in the wake of a damaging security hack in late 2013, fired their CEO, shed a money losing Canadian business and realized all at once that they better get their act together online, and the stock is up nearly 10% in the last year (vs WMT down 30%), albeit down 15% from its all time highs made this summer. Investors have given them a bit of a pass in what is emerging to be one of the most brutal periods for U.S. retailers since the financial crisis.
WMT may get it right eventually. But I wouldn’t hold my breath. And if McDonald’s (MCD) recent stock price resurgence could be used as any guide, sales will likely have to shrink (MCD’s sales are expected to be down 10% this year from its 2013 peak of $28 billion) for WMT before they can return to organic earnings growth. Despite the stock’s recent bounce, holders should be prepared for a rocky ride in the coming year.