Should You Buy Walmart After Online Sales Grow 79%?
Back in July I answered – Is Walmart A Buy As It Preps Its Amazon Prime Killer?
Today, I answer – Should You Buy Walmart After Online Sales Grow 79%? You can read the full article above.
But if you don’t want to; here’s a quick recap of the last article on Walmart.
Walmart’s been a force of nature for 58 years now.
Since its founding in 1962 in Arkansas the company grew to dominate retail in the next few decades as it still does today.
In the last 58 years it overtook and then crushed competitors like the now defunct Kmart with its superior business model and efficiencies to offer continually lower and better prices to consumers.
It still dominates brick and mortar retail to this day… But it didn’t focus on its online efforts and Amazon surpassed it.
But Wal Mart isn’t done in this fight to dominate online retail and people’s wallets.
Over the past several years Walmart’s began competing better with Amazon via its online offerings once it focused its competitive advantages to this arena.
And now it’s taking a direct shot at Amazon by announcing the upcoming release of its “Amazon Prime Killer.”
The leak of this announcement came out on July 7th, 2020 and sent shares up as much as 6.4% on the day.
But should you buy Walmart stock now?
Before I answer that I need to show you what its shares did in the past.
Why Walmart’s Stock Rose 189,240% in 48 Years.
If you invested $10,000 in 1972 when Walmart IPO’d on the stock market and held its shares until today through the various share splits and dividends your shares would now be worth $18,924,000.
This is an increase of 1,892X or 189,240% in 48 years.
Without reinvesting the dividends.
If you reinvested your dividends this number would be much higher but couldn’t figure this number out due to the stock splits and dividends going back decades.
To say Walmart’s done well since its founding is a gigantic understatement.
In this time its shares rose from a split adjusted $0.067 per share to $126.41 per share as of this writing on July 7th, 2020.
This makes sense of course.
Walmart helped transform retail as we knew. And it’s become so powerful over time that its transformed how entire cities develop.
Should You Buy Walmart Stock?
On an operating profit basis Walmart’s produced an average operating profit margin of 5.1% per year on average every year of the last decade.
I look for any company to produce above 10% margins on a consistent basis to consider as an investment.
What about FCF/Sales?
Over the last 10 years Walmart’s averaged 3.1% per year over the last decade.
I look for any company to produce above 5% margins on a consistent basis to consider as an investment.
Walmart’s numbers are below my minimum thresholds… What about its valuation?
Its current P/E ratio is 22.6. And its current P/CF is 11.8.
I look for companies to sell at ratios below 20 to consider the investment undervalued based on these metrics.
So according to its current valuation it’s about fairly valued to slightly undervalued.
I also look at a ton of other metrics and valuations when evaluating a potential investment. But what it boils down to for me is right now Walmart is performing well. But it’s not earning enough in profits and it’s not undervalued enough for me to recommend to you right now.
Does this mean I expect Walmart stock to crash in time? No.
It means it doesn’t meet my specific and extremely strict criteria to recommend you buy it today.
It will continue to perform well over time. And with its new launch of its Amazon Prime Killer it may earn higher profits and cash flow by better competing with Amazon for the online dollar spend.
But I don’t recommend you buy on ifs and mays.
I need certainty to recommend you buy something.
And while I believe Walmart will continue performing well into the future… I’m not certain due to its low profits and cash flows combined with its fair valuation that it’s the best way to invest your money now.
This thesis to avoid Walmart stock for now due to its low profit margins and fair valuation continued playing out on November 17th, 2020 when it released its most up to date quarterly earnings. Sort of.
Revenue rose 5.2% in the year to year quarterly period to $134.7 billion.
Online sales grew 79% in the year to year quarterly period.
Sam’s Club sales grew 11.1% in the year to year quarterly period.
Free cash flow has earned free cash flow of $16.4 billion so far this year. Which is an 69.1% increase over the year prior.
And on and on.
Walmart crushed its quarterly period.
This led its stock to rise from $118.89 per share on July 6th – the day before I last wrote you about its stock.
To $151.06 per share as of this writing.
Or an increase of 27.1% in 4 months.
So, was I wrong about Walmart?
I said you shouldn’t buy its stock right then because of its low profit margins and fair valuation.
And its profit margins are still low.
While its even more overvalued now than it was in July.
Its P/E is now 21.8.
Its P/CF is 12.8.
And its forward P/E is 26.5.
When I recommend an investment, I think about the long term… Not the short term. And these things still mean its not a great investment right now for the long term.
For these reasons – and the ones in the previous article – I recommend you continue avoid buying new Walmart stock.
Even though it crushed earnings. And even with the Holiday season now here in full affect that will continue to drive Walmart shares higher.
Mainly because I’ve found you better potential investments that offer the potential for higher returns.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above