Wal-Mart (NYSE:WMT) announced 4Q16 earnings before the open on Thursday, 2/18, and the results were a mix of good and bad but overall unexciting. Comps were positive driven by higher traffic, but average ticket continued to slip, maintaining a multi-quarter trend of increased traffic through steep discounting. E-commerce growth decelerated and was weak relative to Amazon (NASDAQ:AMZN) sales growth MRQ. The dividend was hiked 2% to $2, good enough for a forward yield of ~3%. Overall, we feel that the stock provides an unconvincing buy thesis at 15.5x EV/FCF with negative/stalled growth and maintain a neutral stance on the stock.
The trend of increasing traffic flow through steep discounting continued in Q4. Traffic was up 0.7% while average ticket fell 0.1%. This is slightly better than the 0.2% drop in average ticket in Q3, but still represents a growing cost of customer acquisition. Expenses increased 129 basis points in the fourth quarter, driven by investments in associates and stores along with e-commerce platform build-out. These are defensive moves against intensifying online competition, namely from AMZN, that drove consolidated operating income down 13.6% ex-FX. While this expense growth should ease over time, we believe increasing competition globally from AMZN should continue to drive defensive investments for WMT. Specifically, we believe AMZN's recent aggressive expansion of logistics in China will intensify competition in an already slowing market. This will likely force some defensive moat build-out investments from WMT which will drive expense growth.
Global e-commerce sales were up 8% in the quarter, and this is a deceleration compared to previous periods. It is also markedly lower than AMZN's 22% revenue growth MRQ.
Grocery delivery provides an interesting growth opportunity for the company. The company expanded online grocery shopping to over 150 locations across more than 20 markets in the US, and the business delivered positive comp traffic growth even while lapping positive comp traffic from last year. The company plans to further expand its online grocery program to more markets this year, along with opening 50 to 60 new Supercenters and 85 to 95 new Neighborhood Markets. This growth, however, is not enough to offset store closures. The company has revised its 3-4% annual sales growth over the next 3 years to flat this coming year.
The dividend was hiked 2% to give the stock a forward yield of roughly 3%, but we aren't terribly bullish on this company as a dividend play at a 3% yield with declining earnings. We also believe the valuation implies limited upside from share price appreciation. The company currently sports a market cap around $206 billion. Inclusive of $8.7 billion in cash and $50 billion in debt, this equates to an enterprise value of roughly $247 billion. This means the stock is trading at a 9x EV/OCF multiple and a 15.5x EV/FCF multiple on OCF and FCF growth of -4.1% and -2.9%, respectively. The stock is currently sporting a 6.5% FCF yield ex-cash versus a ~1.7% 10-year Treasury yield, so that is attractive, but we do not reasonably see investors paying much more than 15.5x FCF for negative/stalled growth, so this implies limited upside for the stock.
We maintain a neutral stance on shares of WMT. We do not think there is much upside at these levels as 15.5x FCF seems optimistic for a company with flat sales, declining earnings, and accelerating spend.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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