Are the Bears Right – is Walmart Doomed or Turning Around?

Black Friday and the recent earnings report have brought our friends the Walmart (NYSE: WMT) bears back out of their caves. The bears are repeating all their familiar arguments; Walmart is the new Sears (NASDAQ: SHLD), Amazon (NASDAQ: AMZN) will destroy Walmart, Target (NYSE: TGT) is about to turn around, dollar stores are stealing Walmart’s customers, etc., etc.

Skeptical investors will want to know what the financial numbers say and if they provide any evidence to support these claims. We should look closely at the numbers because many of the bears are motivated by their personal distaste for Walmart rather than facts.

So let’s take a look at some hard numbers and see if we can identify any trends.

Walmart by the Numbers

What’s truly interesting is that there is some growth at Walmart; it is growing slowly but surely – unlike Amazon. The following numbers show that the world’s largest retailer experienced some growth during third quarter. Yet it also faces some serious problems.

  • Revenue: Grew by $770 million, rising from $483.83 billion in July to $484.6 billion in October 2016. That figure was higher than the $484.03 billion Walmart reported in October 2015.

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  • Net income: fell to the lowest level in years. Dropping from $14.73 billion in July to $14.46 billion in October. In contrast net income was $15.09 billion in October 2015 and $15.83 billion in October 2014.

 

My guess is that the income drop and revenue increase are related. Walmart’s revenues are increasing because of its heavy investment in online infrastructure; especially the Jet.com acquisition and the money spent to roll out Walmart Pay. The online investment is bringing in new sales at a high cost.

That investment is eating into the income so it might not be working. To see if it is paying off we’ll have to take a look at Walmart’s cash.

Is Walmart Making Money?

Walmart is a difficult company for many investors to grasp because its management likes to play a long game. Like Jeff Bezos, the team in Bentonville is focused on long-term growth instead of quick gains, which drives some bears crazy.

The only way to tell if such a strategy is working is to take a look at the cash. One reason why value investors like Walmart, is that its business model; like Amazon’s, generates a lot of float and that still seems to be the case.

Even though Walmart’s net income is falling its cash from operations has risen to new highs. Walmart reported $32.22 billion in cash from operations in July and $32.03 billion in the same category in October. In contrast it reported $28.10 billion cash from operations in October 2015. All that cash gives Walmart a fantastic amount of float.

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Some other cash numbers are down; cash and short-term investments fell from $7.676 billion in July 2016, to $5.939 billion in October 2015. I imagine that occurred because of the Jet.com acquisition.

The free cash flow also experienced a significant drop. Walmart reported a free cash flow of $6.328 billion in July 2016 to $1.873 billion in October 2016. That was higher than the $1.724 billion free cash flow, Walmart reported in October 2015.

Walmart has a lot of Float

So yes folks, Walmart is still making money, the 2.57% third quarter profit margin is for real. The behemoth from Bentonville still has a lot of cash and a fantastic amount of float. That makes the $71.13 stock price reported on November 28, 2016, look like a bargain.

Another figure value investors need to pay attention to is Walmart’s assets; which climbed to $206.86 billion on Halloween day 2016. That was an increase of $8.97 billion over July which justifies the Jet deal. It was also a $1.72 billion increase over the $205.14 billion in assets Walmart reported in October 2015.

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The assets verify something I’ve been saying for a while and will say again: Walmart has far more value than Mr. Market is giving it credit for. The problem is that much of that value takes the form of attributes Mr. Market cannot see; such as the retailer’s sheer size, its’ technology and its’ logistical capabilities.

Is Walmart’s Online Investment Paying Off

Those attributes put Walmart in a good position to take advantage of the growth of online retail. This can occur because Walmart has a very creative management team capable of strategic thought and aggressive implementation.

Seeking Alpha reported that early analysis showed Walmart was keeping up with Amazon in the Cyber Monday battles. Online sales for Black Friday 2016 were 17.7% higher than for the same day in 2015, an Adobe estimate indicated. Adobe estimated that online sales for Thanksgiving and Black Friday hit $5.27 billion.

There was one worrisome indicator for Walmart; ShopperTrak reported that store visits on Black Friday and Thanksgiving fell by 1% between 2015 and 2016. That too justifies Walmart’s spending on e-commerce, particularly the Jet.com purchase.

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Obviously it is too early to tell but it looks as if Walmart is posed for a pretty good holiday season. It will need it, but Walmart has the resources to survive a bad holiday season. Some other retailers like Sears and JC Penney (NYSE: JCP) do not.

Is Walmart a Good Investment?

Interestingly enough Walmart is still a pretty good investment; ycharts reported it had a dividend yield of 2.83% on December 1, 2016, and a return on equity of 18.56% on October 31. Investors are still making money from the retail giant and they are taking home pretty good dividend.

Walmart investors are scheduled to receive a dividend of 50¢ on December 7. That dividend has been increasing at a rate of around 1¢ for some time. It was 49¢ in 2015, 48¢ in 2014 and 47¢ in 2013.

The dividends and Walmart’s planned stock buyback, make WMT a value investment. Despite all the bears’ bad mouthing Walmart is still a good buy and hold play in retail. Those who hold onto this stock through the company’s capital expenditures in 2017 will not be disappointed, although I have a feeling that the Walmart bears will be disappointed.