Wal-Mart Stores: 22% Upside Potential

| About: Wal-Mart Stores, (WMT)

Summary

The company owns more than 9% of shares outstanding in the Chinese online store JD.com (9% of shares are worth more than $7 billion).

Wal-Mart Stores, Inc. is expected to report earnings on 11/17/2016.

The company generated the last five years' annual revenue in a sustainable manner.

Wal-Mart is looking for online sales growth of 20 to 30 percent in the second half of this year.

The company has accelerated investments in online operations and digital from about $300 million in 2013 to $1.1 billion this year for a total of about $3 billion.

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Source: Capital.cl, Chile

Introduction:

Company

Wal-Mart Stores, Inc. (NYSE: WMT) operates through three segments:

  1. Walmart U.S.
  2. Walmart International
  3. Sam's Club

Source: Created by Author

The company generated about $47.8 billion in net sales in 2016. The company generated more than 60% of total revenue in the U.S. As per their website, Walmart helps people around the world save money and live better - anytime and anywhere - in retail stores, online, and through their mobile devices. Each week, nearly 260 million customers and members visit our 11,539 stores under 63 banners in 28 countries and e-commerce websites in 11 countries. With fiscal year 2016's revenue of $482 billion, Walmart employs more than 2.3 million associates worldwide. Walmart continues to be a leader in sustainability, corporate philanthropy and employment opportunities.

Thesis

Shareholders' Value: The company has been paying higher dividends year-over-year. The company is creating shareholders' value by maintaining sustainable revenue growth. The company is ready to adopt new technology, i.e. online sales. The company returned more than $10 billion to the shareholders through dividends and share re-purchases.

Source: Created by Author

Source: Walmart Annual Report 2016

The above chart shows that if you had invested $100 in 2011 it is worth about $135 in January 2016 which is about a 35% gain.

The following was mentioned in the Harvard Business Review:

Do not manage earnings or provide earnings guidance. The companies that fail to embrace this first principle of shareholder value will almost certainly be unable to follow the rest.

Capital Expenditure and Inventory Management: The company is projected to invest $11 billion per year for the next three years. The company is aggressively investing in online business. The company has accelerated investments in online operations and digital from about $300 million in 2013 to $1.1 billion this year for a total of about $3 billion. In the last five years, the company has been maintaining inventory in the range of $41 - $44 billion, very narrow. Holding too much inventory may slowly drain the profits from the business.

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Source: Walmart

Revenue: The company has been generating yearly revenue in a sustainable manner.

  1. Walmart US's revenue has increased by 3.6%
  2. Walmart International's revenue has decreased by 9.4% due to fluctuations in the currency exchange rate
  3. Sam's Club's revenue has decreased by 2.1% due to lower selling prices of fuel

Overall, the total revenue for 2016 has decreased by 0.7% from 2015's revenue.

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Source: Walmart 2016 Annual Report

Revenue Net Income
2012 $446,509,000,000 $15,734,000,000
2013 $468,651,000,000 $16,963,000,000
2014 $476,294,000,000 $15,918,000,000
2015 $485,651,000,000 $16,182,000,000
2016 $482,130,000,000 $14,694,000,000
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Source: Created by Author

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Source: Created by Author

Shares Repurchase: The company has been aggressively buying back its own shares from the marketplace. In the last three years, the company re-purchased 165 million shares which are worth about $12 billion. The average price paid per share is between $65.60 and $75.82.

Source: Walmart 2016 Annual Report

A share re-purchase shows the company believes its shares are undervalued. Because a share re-purchase reduces the number of shares outstanding, it increases earnings per share and elevates the market value of the remaining shares.

Operation efficiency: From 2012 to 2016, the company has been generating net income of about $15-17 billion per year in a sustainable manner.

Liquidity: The company maintains a healthy cash position every year: about $9 billion.

Valuation: The company is currently trading at a P/E ratio of 15, $68 a share. As of January 2015, the average P/E ratio of the retail sector is 33.30 (low of 19.44 & high of 59.46); This average includes large-cap stocks, such as Walmart, Costco Wholesale Corporation, Dollar Tree Incorporated and Macy's Incorporated. The stock is currently undervalued.

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Source: Created by Author

EPS Guidance: The company reiterates fiscal year 2017 GAAP EPS guidance of $4.29 to $4.49, or adjusted EPS guidance of $4.15 to $4.35

Financial Position:

Credit Ratings: As of January 31, 2016, they have strong commercial paper and long-term debt ratings that have enabled and should continue to enable them to refinance our debt as it becomes due at favorable rates in capital markets.

Source: Walmart 2016 Annual Report

2016 Annual Report Highlights: The below are highlights on the 2016 Annual Report:

  1. Third-most visited U.S. retail website
  2. 107% increase in global online net sales over the past four years
  3. Adding online grocery to more markets
  4. 2.3 million employees worldwide
  5. $482 billion total revenue
  6. 2017 - 2019: $45 - $60 billion three-year projected sales growth
  7. 16 websites in 11 countries and 11,530 stores worldwide
  8. More than $10 billion returned to the shareholders through dividends and share re-purchases
  9. Over the past five years, $60 billion in revenue growth and $55 billion were returned to the shareholders through dividends and share re-purchases
  10. 85 million average unique visitors to Walmart.com
  11. 800,000 international associates
  12. Sam's Club: 6.1% increase in membership income

Conclusion:

With intense retail competition, the company is able to sustain its revenue growth by using its skills and expertise in the retail market. Online stores can't be a total replacement of traditional stores but online stores are able to grab some of the revenue from traditional brick-and-mortar stores. Walmart is aggressively investing in online business. It has agreed to acquire jet.com's online business. In addition, it owns more than nine percent of shares outstanding in the Chinese online store JD.com (nine percent shares are worth more than $7 billion). This shows that the company is ready to change its approach to suit consumer demand.

Based on information provided by the company, It is very impressive that it is able to project revenue growth for the next three years; this is what investors are looking for. The company is three years ahead in terms of planning (capital expenditure, inventory control, technology adoption and revenue growth). Walmart's international (outside U.S.) segment generates 26% of total revenue. International revenue will fluctuate a lot due to fluctuations in the currency exchange rate.

Source: Walmart 2016 Annual Report

Based on the current earnings and 2017 earnings guidance, the stock is currently unvalued. The stock has 22% upside potential within short period of time. Based on my analysis, I recommend Walmart as a BUY.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.