Walmart: A Clear Winner Of The Current Pandemic – Walmart Inc. (NYSE:WMT)

Investment Thesis

Despite the current market situation, shares or Walmart (WMT) – American discount retail chain – have held relatively stable in comparison to the broader market. I believe this advantage is likely to persist as the global financial crisis showed that defensive stocks and food retailers did unusually well.

Corporate profile

Walmart is an American discount retail chain operating all over the world – from Africa, Argentina to Mexico, Chile, India and Canada. Since 2000, the company runs eCommerce initiatives which have grown into strategic alliances with JD.com (JD) in China, Flipkart in India and other notable collaborations across the globe. The company’s operations divide into three reportable segments: Walmart U.S., Walmart International and Sam’s Club. In 2019, most of the company’s revenue came from the U.S. (~76 percent of total revenue) and the company employed over 2.2 million people worldwide.

Source: Walmart’s FY2019 Annual report

Key insights from the latest quarterly earnings call

In the latest quarterly earnings call and presentation, the management of the company reflected on the company’s progress and discussed possible ways to move the company forward. The management particularly highlighted positive effect of acquisitions, investments in technologies and new shopping concepts such as online grocery and pick up towers. In FY2020 Q4, Walmart International comparable sales rose in six out of ten markets, with Walmart U.S. experiencing the most positive development in groceries and health & wellness categories. Lastly, the CFO also commented on the chain’s new stores expansion:

Still have several hundred more we’re going to open. – Brett Biggs, CFO

The Walmart economy

It is no secret the company that has tackled with a lot of criticism regarding low wages which have a negative impact on the economy. According to a last year’s article of Washington Post, while Walmart’s store managers earn on average $175,000 a year, full-time workers equal to about $25,200 a year for 34-hour weeks, being roughly double the federal minimum wage. However, based on a recent development of net income per employee statistics – this issue seems to be mitigated.

Financial analysis

From a financial statements perspective, the company has solid profitability (ttm ROE of 20 percent), sustainable level of debt (ttm financial debt to EBITDA of 1.6) and positive operating margins (ttm net profit margin of 2.8 percent). The only element the company is currently struggling with is a poor liquidity (ttm current ratio standing at 0.79).

Valuation

Plugging in Walmart’s financial statement figures into my DCF template, the company’s shares show to be undervalued. Under the perpetuity growth method with a terminal growth rate of 2 percent, 2 percent annual revenue growth over the next five years and stable operating income margin of 4 percent assumptions, the model’s estimate of intrinsic value of the stock comes at 282 USD. Under the EBITDA multiple approach of a discounted cash flow model, the intrinsic value per-share value of the company stands roughly at 126 USD if we assume that the appropriate exit EV/EBITDA multiple in five years’ time is around 10x.

Source: Author’s own model

The bottom line

To sum up, Walmart is a typical example of a defensive stock which investors fully appreciate only when an emergency occurs. With beta under 1, stable dividend payouts and yield greater than those of 10-year treasury bonds, the company is an underappreciated jewel. In times when investors seek safety first, betting on discounted food may be a wise move as people eat regardless of the market conditions.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Disclaimer: Please note that this article has an informative purpose, expresses its author’s opinion, and does not constitute investment recommendation or advice. The author does not know individual investor’s circumstances, portfolio constraints, etc. Readers are expected to do their own analysis prior to making any investment decisions.

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