Great business operations aside, has Walmart's golden new age been able to provide superior investment return to Walmart's shareholders for the past 5 years? Unfortunately, not really.
On the business operations side, we highly applaud Walmart management to be able to grow bigger domestically in US (and generally ruined many mom-and-pop shops and small local retailers) and internationally, clearly solidifying Walmart as true global retailer. In addition, we consider Walmart is unbeatable in global retailing (and obviously, US retailing) and will likely never go bankrupt as long as they maintain or enhance their low-cost operating cost structure, supply-chain innovation and market share expansion & consolidation strategies globally.
However, we are not as bullish on Walmart as investments. All the above positive view and CNBC story on Walmart's successful business operation and improving competitive advantages (Walmart's lean-and-always-low-price-low-cost culture is certainly one huge advantage) do not mean Walmart's stock price is always a good value at anytime. As in anything else, remember the following Warren Buffett's quote: "price is what you pay, value is what you get". Let us look closely at Walmart's stock prices:
- On Oct 18, 2004, stock price was $51.99 per share VS. $50.44 per share on Oct 23, 2009 (5 years later) despite the fact that Walmart has been able to expand internationally increasing its revenues and profits as well as cash flow for the past 5 years. Note: this does not mean going forward the stock price will show similar historical performance.
- The inflation-adjusted and US Dollar depreciation-adjusted performance of the Walmart stock for the past five years is clearly a negative (which means a loss.)
Why has Walmart, the greatest retailer the world has ever known, only been able to generate inferior investment return (infact, a loss) for the past 5 years? Here is our attempt to explain the logic:
- Great companies do not necessarily translate to great stock performance over the short-term nor long-term; and vice versa. This is a reality investors should not ignore when they evaluate any large companies (hint: you can check Microsoft stock price for the past 5 years: $ 27.74 per share (Oct 18, 2004) vs. $27.99 per share (closing price on Oct 23, 2009, 5 years later) -- a 5 years stagnation.)
- Companies with large revenues and large presence in the US and globally generally are having harder and longer time to grow faster than companies with smaller revenue base; this is a simple mathematical fact. e.g.: to grow $50 billion in revenues to $100 billion in revenues is harder and likely much longer than to grow $500 million in revenues to $1,000 million in revenues. Hence, investors generally will prefer smaller high-growth companies to provide them higher probability to obtain market-beating investment performance return over the long-term.
- Our conclusion for large companies (above $20 billion in revenues) from investment attractiveness point of view is strongly in agreement with this timeless statement from Warren Buffett, the world's greatest investor: "The investor of today does not profit from yesterday's growth."