There was a lot of noise made about Walmart’s (WMT) relative out-performance to the S&P 500 (SPX) in 2016. It up about 8% on yesterday’s close vs the SPX down about 6%. The out-performance was is sharp contrast to 2015, when WMT was down nearly 30% vs the SPX flat on the year. In 2016 it was assumed that a lot of Amazon’s (AMZN) gains came from WMT’s pain (AMZN was up more than 100% last year). I have a slightly different view. Of course the secular shift in retail and AMZN’s lack of interest in turning a profit makes them a difficult competitor. But WMT has also been hit with the headwinds that have hurt U.S. multinationals over the last year and half. And the supposed benefit of lower gas at the pump has merely offset a small part of the other bad stuff going on as earnings declined 10% in fiscal 2016 on a 1% sales decline.
This morning, WMT guided down fiscal 2017 (current year) vs their prior sales guidance given in November of up 3 to 4% this year, to “about flat” and the stock is trading down $3, or about 4% in the pre-market right now inline with the implied one day move.
In my preview of WMT’s earning’s, I had the following to say:
I suspect despite the closing of dozens of poor performing stores, the company will feel the continued sting of AMZN’s online competition, namely margin and eps pressure from their tech build to better compete with AMZN, combined with weak sales overseas, weaker margins in food sales here in the U.S. and the potential for a meaningful guide down for fiscal 2017
The stock trades at about 16x expected fiscal 2017 earnings. I see no reason why a stock like WMT with low single digit sales growth at best, who has massaged earnings with massive buybacks should trade at a market multiple.
The first part was fairly well known, but the second part is what I want to focus on right now. Why on earth would anyone look to bottom fish in WMT at current valuation at a time when many of the headwinds ailing the company and depressing the stock appear to be structural? On the conference call, the CEO appeared tired of deflecting headwind and tried to emphasize a tailwind:
*WAL-MART: LOWER FUEL PRICES MAY PROVIDE TAILWINDS IN THE U.S.
The key word there is MAY. It has not been a great tailwind so far as the deflationary forces driving down the price of oil has adversely affected a subset of WMT shoppers. And it’s a double edged sword now because if oil prices were to have a significant bounce due to supply adjustments, not having to do with an uptick in the economy, that could quickly become a headwind for WMT.
Over the last couple months I have heard bulls on the stock suggest that it is defensive in this economic and market environment. I fundamentally reject that notion.
To reiterate, a stock with no earnings leverage, no growth, massive sensitivity to forex moves (they lost $12 billion in net sales to dollar strength in fiscal 2016), relying on a customer that is the most fragile, compteting with a juggernaut of a competitor in AMZN, forcing them to spend billions to move to an omni-channel selling model, should trade at a huge discount to the market. It does not. And today’s losses only make it more expensive.
On to the technical set up, here is what I had to say yesterday. It all still applies:
The two year chart below shows the sharp downtrend from its early 2015 highs above $90, to its November lows near $56. Since Nov the stock has made a series of higher lows and higher highs, but over the last few weeks has consolidated in and around its 200 day moving average:
WMT 2 year chart from Bloomberg
If there is a fiscal 2017 guide down, a move back to the downtrend from the Jan 2015 highs in the low $60s could be in the cards.
I suspect we see a re-test of the downtrend in the coming weeks, and the stock is probably a short on rallies. BUT, here is a huge but… While the stock appeared to be attempting to put in a bottom since the November lows, Wall Street analysts remained skeptical, with few’s estimates matching that of the company’s guidance, with only 5 Buy Ratings, 24 Holds and 2 Sells, with an average 12 month price target below where the stock is trading at $64. WMT is the sort of stock that will need time to work again. Time for the volatile elements in the economy effecting their customers to moderate, time for their investments in technology to take hold, and time for the company to right size, all in an effort to once again grow sales off of a massive $480 billion base. This happens from lower levels in my opinion.
