A 'first look' at Walmart; More reason to like Alphabet's stock
1) After recently taking a look at two of the highest-quality businesses in the world, I'll focus on another one today...
As a reminder, I discussed credit-card giants Mastercard (MA) on Wednesday and Visa (V) yesterday.
Today, let's check out Walmart (WMT).
The discount-retail giant is a household name. And its stock caught my eye because of this recent New York Times article: Can Walmart Shed Its Discount Vibe? Its New Home Office Offers a Clue. Excerpt:
"There are no cash registers in the home office."
It's a mantra at Walmart and a reminder that every dollar earned comes from its nearly 11,000 stores worldwide. Everything done at its corporate headquarters in Bentonville, Ark., is an expense.
For decades that expense was minimal – the retailer's main office was a spartan distribution center with wood-paneled offices and few windows. Most of the white-collar employees here were focused on merchandising and logistics.
But, as the article continues, that line of thinking has shifted...
[The] company has had to figure out how to compete in an increasingly tech-fueled, competitive industry. A big symbol of that is a multibillion-dollar splurge on a new headquarters meant to attract and retain top talent and modernize the ethos of the discount store Sam Walton founded in 1962.
Walmart built its empire by dominating on price. But to maintain that empire it must now compete on convenience, breadth and speed. During Associates Week – its annual gathering of thousands of employees from around the world – the company made a number of tech-focused announcements, like a new artificial intelligence assistant that it says will help customers shop online and an expansion of its drone home-delivery operation to more cities.
Turning to the stock itself...
After languishing for a dozen years from 1999 through 2011, it has been a massive performer since then – as you can see in this 20-year stock chart:
So let's dive into the financials with my usual overview.
As usual, we'll start by looking at Walmart's revenue and net income over the past two decades.
We can see that revenue has grown steadily, albeit slowly (4.2% annually)... while profits have been erratic, only last year surpassing the level first reached in 2010:
Operating cash flow hasn't been quite as erratic as net income, but it still fails to impress – it has barely grown in the past decade. Meanwhile, capital expenditures ("capex") have more than doubled in the past four years, crimping free cash flow ("FCF"). Take a look:
Meanwhile, Walmart's balance sheet is strong. The nearly $60 billion of net debt is modest for a company of this size and with such stable cash flows:
Next, Walmart's capital allocation is "meh" – to put it bluntly...
After more than a decade, the company finally increased its dividend more substantially last year – by about 9%. But the stock still only yields about 1%.
Walmart has also mostly made small acquisitions. The exception is the company's big purchase of an initial 77% stake in Flipkart, India's largest online retailer, in 2018 – the success of which is still unclear.
Meanwhile, Walmart's share repurchases are all over the map.
This next chart tells the story:
The share repurchases might be erratic, but they've still resulted in a 36% decline in the share count (2.3% annually) over the past two decades:
Overall, Walmart's financials present a decent-but-not-fantastic picture, as the company has struggled to grow profits and FCF.
Turning to valuation...
As of yesterday's close, Walmart has a roughly $766 billion market cap. And adding net debt to that figure means an enterprise value of about $826 billion. The stock is trading at about 1.2 times trailing revenue, 18 times trailing earnings before interest, taxes, depreciation, and amortization, and 41 times trailing earnings.
Consensus analyst earnings estimates for this year are $2.62 per share, so that would mean the stock is trading at about 36.9 times current-year earnings.
That's a very high earnings multiple that should only be reserved for high-quality and high-growth businesses.
So at current levels, I don't like Walmart's stock. Talk to me when it's trading at less than 20 times earnings...
2) On the other hand, I continue to like Alphabet's (GOOGL) stock...
It's much cheaper that Walmart – trading at only about 18.1 times this year's consensus earnings estimates – despite being an even better business with stronger growth prospects.
Plus, it has embedded optionality like Waymo, as this new "Heard on the Street" column in the Wall Street Journal highlights: Tesla's Robotaxi Launch Shows Google's Waymo Is Worth More Than $45 Billion. Excerpt:
Tesla's (TSLA) long-awaited robotaxi service has finally hit the road. But rather than help justify the electric-car maker's sky-high valuation, it really highlights how underappreciated Google-parent Alphabet might be for its own, much more advanced self-driving venture...
Tesla has to start somewhere. But the launch also serves as a reminder of how much road remains between it and Waymo. The robotaxi service, majority-owned by Alphabet, started service in Atlanta this week. That makes five cities served by a fleet of over 1,500 autonomous vehicles in total. Waymo plans to more than double that fleet by the end of next year, thanks to a new manufacturing facility in Arizona.
And as the column continues:
Investors are on board. Waymo raised $5.6 billion in a late-stage funding round last year. That deal valued Waymo at $45 billion, which put it among the 10 most-valuable, venture-backed companies that haven't yet gone public, according to data from PitchBook.
Some Wall Street analysts covering Alphabet have higher estimates now, given Waymo's strong lead in the robotaxi service market and a partnership with Uber that is expected to boost usage. Josh Beck of Raymond James put a "base case" valuation of Waymo around $150 billion in a report last month. He projects the company's gross bookings will average 129% growth annually for the next five years.
I'll say it again – I'm still pounding the table on Alphabet's stock.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.