Walmart Stock Is At a Crossroads

A disappointing fourth-quarter earnings report sent Walmart Inc (NYSE: WMT) stock tumbling 10 percent last week, as WMT had its worst single day of trading since January 1988.

Now that the dust has settled on Walmart’s horrible quarter, analysts and investors must determine whether the latest numbers are an aberration or the beginning of a new trend.

Most of the headlines from the fourth-quarter earnings report focused on a dramatic slowdown in online sales growth, which dropped from 50 percent in the third quarter to just 23 percent in the fourth quarter. But as bad as the online sales number was, BMO Capital Markets analyst Wayne Hood says Walmart’s disappointing 2018 earnings guidance may be even more troubling.

Walmart guided for 2018 earnings per share of between $4.75 and $5 compared to consensus estimates of $4.99. Hood says investors were hoping Walmart’s heavy investments in online and omni-channel sales and its uptick in revenue growth in 2017 would translate to growth in earnings before interest and taxes in 2018. Instead, management said EBIT margins will fall from 4.53 percent in 2017 to between 4.3 and 4.4 percent in 2018. Walmart’s EBIT has already dropped by $4.9 billion since 2014, an 18 percent decline.

Hood says the long-term goal for Walmart management appears to be to stabilize EBIT margins.

“However, the price and store/online experience investments required to sustain/accelerate revenue growth makes achieving a flat EBIT margin challenging,” Hood says.

Even after a 16 percent pull-back from its 52-week high, Hood says Walmart stock is not yet a clear value for investors.

“We would look to become more constructive if the stock were to pull back to $80 per share or if we sensed the EBIT margin rate could remain flat or inflect higher than anticipated, [which] would recalibrate the stock’s [price-earnings ratio] higher.”

Other analysts, such as Bank of America analyst Robert Ohmes, say Walmart’s same-store sales growth and positive traffic trends are indications that its underlying business remains strong.

“We believe WMT’s omni-channel transformation in the US will continue to gain momentum and support more sustainable and predictable positive same-store sales and traffic at U.S. Supercenters and U.S. e-commerce and [gross merchandise volume] growth that should support P/E multiple expansion,” Ohmes says.

BMO has…

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