Wal-Mart Vs. Amazon

Mar. 28, 2017 3:43 PM ETWalmart Inc. (WMT), AMZNCOST66 Comments
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Summary

  • Wal-Mart is introducing more mobile products that will enable it to compete on more even terms with the likes of Amazon.
  • Despite this, we believe that Wal-Mart isn’t far enough along the technological front to make meaningful progress on this front.
  • Moves like the recent acquisition of Jet are likely the closest it will get (at least in the short term) to its more online competitors addressing recent areas of weakness.
  • We believe that Wal-Mart’s ability to exceed earnings expectations sets it up for a higher earnings multiple and anticipate a 19.5% total return on the stock over the next year.

Analysis

Has Wal-Mart Taken a more aggressive step into streaming?

In a move that investors are more likely to associate with Amazon (NASDAQ:AMZN) or Netflix (NFLX), Wal-Mart (NYSE:WMT) recently unveiled a 'disc-to-digital' feature in its Vudu app that allows users to scan the barcodes on their physical digital media (Blu-ray or DVD) and watch the corresponding video on their mobile device. The service costs as little $2 per title and is limited to 8,000 titles at launch.

This isn't the first time that Wal-Mart has introduced innovative digital offerings through Vudu, which it acquired in 2010 for a reported $100 million. To wit, in October 2016, it launched Vudu Movies On Us, which made thousands of older movie titles available to stream for 'free' - that is, at the cost of watching some pre- or mid-roll commercials.

The disc-to-digital move is part of Wal-Mart's efforts to reorganize its technology unit to enhance its Mobile offerings - and part of a larger overall effort to compete online, where its own sales had been flagging prior to the acquisition of Jet.

Dividend and Recent Performance

Investors interested in Wal-Mart are certain to note its relatively high dividend yield of around 2.9%, which is better than the average for the Dow Jones Industrial Average and the S&P500. Its yield also happens to be superior to that of its peer group, which currently pays half the yield that Wal-Mart does. More importantly, Wal-Mart has a long-history of dividend increases: its most-recent dividend increase to $2.04 for Fiscal 2018 marked its 44th consecutive year of increasing payouts to investors.

Wal-Mart's stock hasn't had a very strong year - it's up marginally (less than 1%) in the 2017, trailing the performance of both the major indices, which have risen by north of 3.9%. Even so, Wal-Mart's performance has surpassed that of the S&P Retail ETF (XRT), which has dropped by 6.3% in the year-to-date. The retail ETF includes a number of Wal-Mart's competitors (across different verticals) among its top holdings, including Costco (COST), Amazon and Netflix.

Considering its performance thus far in 2017, investors could be in for a 'pop' if Wal-Mart exceeds expectations. However, analysts aren't expecting much: the average earnings estimate for Wal-Mart in 2018 is $4.32 per share, which slightly higher than the mid-point of $4.30 provided in Wal-Mart's earnings guidance but is flat compared to Wal-Mart's adjusted EPS of $4.32 in Fiscal 2017. Wal-Mart beat earnings estimates by a cumulative $0.09 per share in Fiscal 2017 so banking on the same level out outperformance relative to expectations would only put Wal-Mart at around the top-end of its guidance (i.e. at $4.41 per share)

Good Timing on the Jet Acquisition, Not So Sure About Mobile…

As we noted, the acquisition of Jet for $3.3 has helped put back some luster into Wal-Mart's online performance. To wit, Wal-Mart's consolidated online sales increased by 29% in its Fiscal 2017 fourth quarter - prior to the acquisition, Wal-Mart's online sales were growing in the low single-digit percentage point range.

This is notable because while ex-auto retail sales grew by 3.7% in February, the headline figure was driven mainly by strength in sales at building materials stores (+6.1%), pharmacies (+6.1%), gasoline stations (+14.8%) and electronics retailers (+11.5%). In that sense, Jet enabled Wal-Mart to expand its customer base at a time when sales at General Merchandise stores fell (-0.9%).

Looking ahead, Jet should help Wal-Mart continue expanding its online sales - probably in the region of 20%-25%, which would translate to around a positive 30-basis point impact on Wal-Mart's top-line. For the year, Wal-Mart is expecting 2 to 3% Net Sales Growth so our estimate would imply that around 10% of its growth will come from e-Commerce.

Of course, the big question is what Wal-Mart can do to narrow the enormous gap between itself and Amazon on the e-Commerce front. This remains to be seen as the company only recently began its reorganization - but it's possible that one by-product of this move is the introduction of its own digital assistant along the veins of Amazon's Alexa. Such a move would be unexpected given Wal-Mart's lack of a track record in technological innovation but would fit Wal-Mart's recent thrust of attempting to match Amazon's offerings - witness its recently-scrapped Amazon Prime-type service.

That being said, historically, Wal-Mart has excelled at extracting efficiencies from its supply chain - and given its relatively lateness to the technology game, it could simply elect to outsource a competing offering. For instance, Wal-Mart could explore a tie-up with Alphabet's (GOOG) (GOOGL) Google - which recently launched its Google Home product in an attempt to make its Assistant service ubiquitous - and enable shoppers to order items from nearby Wal-Mart stores. Could "Google, order me a new television from Wal-Mart" be on the cards soon?

In any case, we don't anticipate that there will be a radical transformation of how Wal-Mart interacts with its customers anytime soon.

Conclusion

Wal-Mart is currently trading at around 16-times its trailing year's earnings. Amazon is trading at 173-times. That's a huge valuation gap and something that Wal-Mart's management is keenly aware of - hence the continuing foray into areas such as streaming, in particular, and mobile in general. Wal-Mart trading at Amazon's multiple would be, far and away, the world's most valuable company (at $2.3 Trillion).

We don't see this gap narrowing anytime soon - or Wal-Mart getting anywhere near Amazon's multiple. That said, a gap we do see narrowing is that between the S&P500, which trading at 24.5-times trailing earnings. The recent performance of the retail sales suggests that there's an incipient recovery in the space that could translate into earnings upside for Wal-Mart.

In our view, Wal-Mart's earnings are likely to come in at around $4.40 in Fiscal 2018 - or at the top-end of the company's guidance. That would still place it at 16-times earnings, which would mean that its trading at a discount to the S&P500's 18.3-times earnings.

We believe that Wal-Mart should be trading at the same forward multiple as the S&P500 and so our target price for Wal-Mart is $80.5 per share, which would give it a 16.6% upside - or about 10% better than the current consensus of $73 per share. Adding Wal-Mart's current dividend yield of 2.9%, investors are looking at a potential total return of 19.5% by buying Wal-Mart today, a robust return for a blue-chip stock.

This article was written by

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Black Coral Research, Inc. is a newsletter designed to inform Dividend Investors how the latest news could impact the dividends of the companies they invest in. Feel free to contact us at BlackCoralResearch@gmail.com
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Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in WMT over 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.

Additional disclosure: Black Coral Research, Inc. is a team of writers who provide unique perspective to help inform dividend investors. This article was written by Jonathan Lara, one of our Senior Analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article. Company financial data is taken from the company’s latest SEC filings unless attributed elsewhere. Black Coral Research, Inc. is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. Investing involves risk, including the loss of principal. Readers are solely responsible for their own investment decisions.

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