Thursday, October 15, 2015

Is Wal-Mart still a great stock?

Wal-Mart shocked a lot of investors and analysts the other day when the CEO let everyone know profits could slip by 12% in its next fiscal year. The drop is attributable to its increased employment costs, moderate sales growth, and increased capital expenditures.

One item to note is that the company plans to only spend $900 million on e-commerce for FY 2016, and then $1.1 billion for FY 2017. Odd considering the company has previously cited Amazon and other retailers e-commerce platforms as a threat to the company. The press release can be found here. A plus side is that the company has decided to initiate another $20 billion in share repurchases over this time period. Let's do some quick math to estimate the share count reduction.

Shares Outstanding: 3.21 billion
Assumed average purchase price: $68

20bil/68= 294.1 million shares purchased
3.21bil-294.1mil = 2.91bil shares left
294.1mil/2.91bil shares = 10%

In other words the company is looking to purchase 10% of the outstanding shares even if the shares traded almost 10 points higher than they are today. Its important to note that only 1.37 billion shares are floating as the Walton Family still owns a large portion of the company.

Coupled with the fact that they expect to generate $80 billion in cash over the next 3 years($26.6 billion/year) there seems to be no anticipation of a downturn in Wal-Marts balance sheet. The company has also generated a dividend growth rate by my calculations of 12.5% the last 10 years. With some back of the envelop math that means the company might be paying about $7.5 billion for 2015, $8.5 billion in 2016, and $9.5 billion for 2017 in dividends each year. That would keep its payout ratio around 35% which is very close the current 34% payout ratio from operating cash flow. Of course dividend growth and cash generation could slow which investors will need to keep an eye on.

According to the guidance from the company worst case scenario is EPS comes in at $3.88 - $4.14 if we take a 12% reduction at both ends of next years guidance of $4.40-4.70. At worst that means Wal-Mart is currently trading at 15 times earnings for the rough years ahead. Not really overvalued in my opinion.

The overall situation bodes watching in the near term.  As of now almost all the bad news is getting priced into the stock. Watching the technicals will be key to see if the stock holds along any historical support lines.  It will be interesting to see if Warren Buffet dumps his shares in the next 13G filing. In the meantime I'm going to watch the stock for a potential add. Companies with $485 billion in annual revenue don't disappear very easily.

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