We wrote this article to better inform short-term earnings speculators on 3 stocks that are highly popular. Our aim was to contextualize what it takes to beat earnings beyond 'common sense'. We subsequently placed a valuation on 1 stock which is a buy opportunity in our opinion. Our coverage today is on Alibaba (NYSE:BABA), JD.com (NASDAQ:JD)/(OTC:OTCPK:JDCMF), and Walmart (NYSE:WMT). Investors should note that we based our opinions on our own predictions.
Alibaba is expected to release its earnings report on May the 13th. The company beat its latest earnings estimate with an EPS beat of $0.21, and a revenue beat of $713.14 million. According to Seeking Alpha, analysts are expecting an EPS of $1.86 and revenue of $27.65 billion.
Alibaba has beaten all of its past 8 EPS surprises. We'd like to emphasize the EPS metric as this reflects the value to shareholders more accurately than looking at top line or even bottom-line earnings alone.
There are a few things we noted, which could affect Q-1's report:
- Revenue CAGR (5y) is 46.2%, which is significantly more than the sector average of 6.2%, this can be expected to continue due to the company's market share. Additionally, we think that strong online sales persisted in 2021 Q-1, especially with regards to B2B.
- Alibaba has a free cash flow yield of 4.4% versus its sector average of 1%, free cash flow is essential in determining the stock's intrinsic value.
- An approximate cost of debt of 4.51% with an interest coverage ratio of 44.87x should see the company's servicing of debt obligations being of minimal effect on bottom-line earnings.
- The company has been trying to improve on its Cash Conversion Cycle for the past 3 years. Days of receivables have been increasing whilst days of payables have been decreasing. The CCC has decreased from -53 days to -44 days between 2019 and 2020. If the company chooses to continue reducing payables and increasing receivables time periods, revenue reported in Q-1 2021 could be lower than expected.
- The company isn't holding and deferred tax assets on its balance sheet but has a deferred tax liability of $9043.00 million, liabilities could have been paid in Q-1 2021, which would drive down earnings.
- Alibaba has started capitalizing leases of $4648.7 million in 2020, this could reduce net income but will increase the strength of the balance sheet, you'll thus see higher Enterprise Value/Earnings multiples, which could discourage some value investors.
We think that although Alibaba will possibly match expectations, they won't smash expectations as they did throughout 2020 which could be discouraging to many tech investors.
In our humble opinion, we don't see Alibaba trading well for the next quarter as they really need to outgun expectations to breathe new wind in its sails. The stock is down YTD and lacks momentum. The stock has to be placed on a hold list for us.
JD is due to report on May the 10th saw a surge in its stock price for most of 2020, which caused much optimism for investors. We bought the stock in Q-3 2020 thinking that it was a great momentum play but had to sell off 3-months later due to the fact that regulatory issues in China started to arise, we didn't want to take the risk and it proved to be a good decision (we sold at $89).
The company beat its latest earnings expectation with an EPS beat of $0.05 and a revenue beat of $854.66 million.
JD has beaten all of its last 8 earnings releases but at a decreasing rate. We had a look at what can be expected moving forward:
- JD has a revenue CAGR (5y) of 32.7% versus a sector average of 7%, we yet again think this would've continued in Q-1 2021 due to increasing online sales and in their case an increase in online sales to consumers.
- The company has a decreasing free cash flow yield versus 2019 (6.9% to 4.1%), but it's still 4.1x larger than the 1% industry average. Capex increased by $937.4 million for the year 2021, which could explain the decrease in yield. The Capex can be seen as expansionary and will add to topline revenue.
- JD has improved on their days of sales outstanding for the past 3 years (18, 8, 6) which means that the company might've tightened bad credit sales or reduced receivables in general. This could improve the quality of JD's earnings and make for easier analyst forecasts.
- The company saw an increase of 86% in deferred tax assets and a 35% increase in deferred tax liabilities. Should JD exercise its asset advantage the company could report higher net income.
- The company added 49% extra capital leases to its balance sheet, which could show lower operating income and a higher enterprise value.
- The company is expected to see a constant net income margin increase up to 2030 (chart below).
A constant increase in net income margin along with a surge in EPS expectations will certainly increase the bottom-line as well as the earnings' worth to shareholders. The company has an approximate cost of debt of 4.73%, which is low enough for the net earnings to remain healthy for the long-term, we think we'll see the bottom-line performing above expectations most of the time.
Based on accounting metrics we think that the company somewhat reported earnings conservatively in 2020. Earnings might be reported more aggressively in Q-1 2021, we consider the stock a buy and placed a price target for investors.
Asset Base Valuation
The data we used for this valuation was found on Gurufocus and Yahoo Finance. Investors should consult their registered investment advisors before making a decision on our price targets as they're our own calculations.
Equity Value Per Share = (Enterprise Value - Debt (Market Value) + Cash (Market Value) - Minority Interest.)/shares outstanding
We found: ($39.01 billion - $31.55 billion + $146.66 billion - $2590.89 million)/1.56 billion = $102.57
Based on institutional consensus the stock is undervalued as well, TipRanks' sample shows that the mean price target is $106.47.
The stock is undervalued (see the top of the page for price at publication) relative to its fair value. JD is a strong buy, in our opinion.
We've been struggling to get our head around Walmart as we back the stimulus check effect and stock rotation (from tech to defense) but finding value in the stock has been difficult and investors seem to prefer other consumer stocks. Walmart is set to report on May the 18th and here are our findings.
Walmart actually missed EPS expectations by -$0.12 in their latest earnings report, they did however beat revenue estimates by $3.77 billion.
Walmart has a history of missed expectations with either revenue or EPS. Two factors investors should consider with regards to this is:
- It's a mature company and growth isn't as high as it used to be. This results in topline expectations being somewhat mixed and the company won't really outperform or underperform estimates by significant amounts.
- Very important to know is that Walmart has purchased back 19 million shares in Q-1 2021, which will definitely contribute to EPS.
- Accounts receivables decreased whilst account payables increased. This could have an adverse effect on revenue for Q-1, as more cash might be flowing out instead of in.
When one looks at the CCC above you can see that there's been a trend downwards and this could well be reversed in 2021 as you don't really want a negative CCC (It's bad for debt covenants). A reversal would mean that assets would increase and liabilities would decrease, this is contrarian to earnings, which is why we think it's a big negative.
- A free cash flow yield of 6.6% is higher than the sector average of 3.2%. We see this continuing due to stimulus checks in Q-1.
- Walmart's 5y CAGR in revenue ranks in the 50% percentile in the sector.
Consumer staples in the U.S. will see an increase in the top-line and bottom-line (cheaper borrowing) earnings, we just think that others in the sector will be more popular bets for investors.
- Deferred tax assets decreased (-4%) whilst deferred tax liabilities increased (27%). This is not a good sign for earnings speculators. It's likely that Walmart wanted to reduce this gap prior to a possible corporate tax increase. This is bad news for bottom-line earnings.
- Capital leases decreased by 18% in 2020, if these are to be expensed in Q-1 2021, operating earnings will suffer.
- Pensions weren't paid out in 2020, comprehensive income might decrease throughout 2021 as a consequence.
As discussed, we think that share buybacks will increase EPS. But by looking at the graphs above, the revenue estimate is flat for 2021. We think this is owing to the sales versus earnings trade-off (meaning actual sales versus accounting metrics).
In a similar vein to Alibaba, Walmart shows no momentum. We had a look at its value multiples to ensure that there really wasn't any need for us to do a valuation for investors.
In our opinion, Walmart is stock investors should stay out of for the Q-1 earnings report. It's a long-term hold in our opinion, if anything will drive the price upwards it's going to be conviction sentiment or earnings reports in 2022 but definitely not Q-1 2021's earnings report. We don't see it as a short-term buy or sell opportunity and thus didn't look at value metrics. Zacks Equity Research however places a 3-Hold rating on the stock and we totally agree.
We wanted to provide context to investors with short-term time horizons on 3-stocks that are receiving high traction. After analyzing these 3-stocks we concluded that JD.com is a good play and value metrics as well as accounting estimates back up this argument, with Wall Street also placing buy ratings on the stock within the past month. Alibaba and Walmart are in the balance and we see both stocks being a dangerous play for earnings speculators. Our Accounting estimates show that Alibaba has strong yielding cash flows but tax liabilities and the net operating cycle is an issue. Walmart is a potential gainer out of stimulus checks but accounting metrics show that the report could provide unimpressive results and see them miss earnings again, which has been a trend before. So in a nutshell, be careful!