In the last three months Walmart (WMT, Financial) has moved higher by nearly 7%, and I had expected this move in an article that I wrote earlier on GuruFocus. I was of the opinion that the nearing of the festive season will take the stock higher as the consumer confidence in U.S. is currently at its highest levels since the financial crisis.
With Walmart reporting good set of third-quarter numbers, I remain positive on the stock for the coming two quarters as well, and I believe that the stock will continue to trend higher as it has done in the last three months. The next two quarters sales will be driven by the positive impact of the festive season; it is a good time to remain invested in the stock.
Coming to the third-quarter results that were announced today, Walmart reported an increase in revenue of 2.8% for the third quarter o 2014 to $118 billion in net sales. The company’s diluted EPS came at $1.15 per share, which was within the company’s guidance range of $1.1 to $1.2 per share. Therefore, I believe that the numbers are largely in line with market expectations and an increase in U.S. comparable sales by 0.5% is a positive. Walmart is expected to move higher on the results day as indicated by the pre-opening levels.
The company’s guidance for the fourth quarter is also robust with Walmart expecting an EPS of $1.46 to $1.56 per share. In the fourth quarter of 2013, Walmart had reported an EPS of $1.34 per share, which included approximately $0.26 in discrete items. Therefore, the outlook is robust for the year and this means that the stock will continue to move higher in the last three months of 2014.
For the full year, Walmart has provided guidance in the range of $4.92 to $5.02 per share and even if the mid-range of the guidance is considered, Walmart is likely to report an EPS of $4.97 for FY14. At a current stock price of $79.2, the stock is therefore trading at a FY14 PE of 15.9 and I don’t believe that these are expensive levels for a stable stock with strong fundamentals and a dividend yield of 2.4%.
I must mention here that the company’s ROI has declined to 16.4% as of October 2014 as compared to 17.5% as of October 2013. However, investors should not consider this as a negative factor or concern as the ROI has been impacted by continued capital investment in store growth and e-commerce. For the third quarter, the company’s e-commerce sales increased by 21% year over year and if this robust growth continues, the ROI will improve over the long-term as these investments translate into returns.
Besides investment in e-commerce, Walmart is also making an investment in mobile capabilities as the company tries to remain in sync with the new technologies. This is a positive factor as it will help Walmart compete more effectively. With the festive season approaching, Walmart’s online sales can make a big difference and the recent record sale by Alibaba (BABA, Financial) speaks volumes about the potential that remains in the e-commerce space.
Another positive from outside the business that helps the company’s margin in the coming quarters is the lower fuel price. While fuel prices can increase in the winter season, the current prices are attractive enough for Walmart from a margins perspective.
In conclusion, Walmart has several positives that will come in the next two quarters (primarily in terms of strong results). The stock has been a value creator through dividends and share repurchase in the last few years. In the last three months, a stock appreciation of 7% has also been significant. I expect more stock appreciation along with continued strong dividends. Walmart is a stock to hold for the next two quarters.
