Streetwise for Friday, September 1, 2017

My past references regarding Wal-Mart greeters was not intended to disparage Wal-Mart or their greeters. On the contrary, I like Wal-Mart, its shares, its management and the fact that they are willing to offer employment to the elderly and disabled.

Nonetheless, no one should need to spend their golden years working at minimum wage. Investing in equities, while not a guarantee, does help ensure a successful retirement. However, you need to find corporations with winning records of accomplishment, which brings us back to Wal-Mart (WMT).

Why is Wal-Mart of such interest right now? Simply because Amazon is looking for Wal-Mart’s jugular and Wal-Mart is looking to slay it latest competitor. Wal-Mart takes no prisoners.

When I last wrote about the company a year ago, my earnings estimate for fiscal 2017 (Wal-Mart’s fiscal year ends January 31, so we are now in fiscal year 2018) was $4.50 per share, with a 12-month target price on the stock of $77. So how did the mammoth retail giant do? Earnings came in at $4.32, a bit light compared to my estimate, and the shares recently closed at $78.54.

However, those numbers do not tell the whole story. Wal-Mart reported $78,738 million in domestic revenue for its second quarter, or 63.8 percent of total revenues. With six out of every ten dollars Wal-Mart makes coming from domestic sales, Wal-Mart’s fortunes swing up and down with its domestic performance.

At the same time, Wal-Mart reported sales growth of 1.8 percent when compared to the same period a year ago. An excellent number considering the way most retailers are suffering from the industry’s competitive squeeze.

The company’s strong performance can be attributed in part to their recent successes in e-commerce. For the second quarter, e-commerce accounted for 70 basis points of Wal-Mart’s growth (100 basis point is equal to one percentage point), compared to 40 basis points in the same quarter a year ago.

With e-commerce keeping its sales numbers moving, Wal-Mart improved its average sale per customer without hurting traffic. And it has steadily improved its digital sales channels through acquisitions, as well as free two-day shipping without membership fee, offering multiple pick up methods, etc. Although acquisitions helped, most of company’s online sales growth was organic.

Wal-Mart’s stock keeping units (SKUs), or unique items in inventory have increased from 10 million in the first quarter of 2017 to 67 million at the end of the second quarter.

So, how close is Wal-Mart to mounting a direct challenge to Amazon on its own turf? If Wal-Mart can maintain its current online sales growth, it will come closer and closer to that goal every year.

Keep in mind that Wal-Mart already has stores within ten miles of 90 percent of the U.S. population. The combination of large stores, smaller format Neighborhood Market stores and online operations will allow Wal-Mart to ship products more efficiently to its customers, and offer better prices for those customers desiring to pick up their purchases.

Last-mile shipping is the most expensive part of the online ordering journey, and Wal-Mart sits on a huge advantage due to its vast physical presence when compared to Amazon’s physical footprint.

Finally, second quarter operating income was $4,618 million, representing an operating margin of 5.86 percent. What if Wal-Mart chose to lower that to 1.9 percent, which was Amazon’s operating margin during the second quarter. I do not believe Wal-Mart will do so, but the threat is there.

The intrinsic value of the shares, using a free cash flow to the firm model is $153 per share. My earnings estimate for fiscal 2018 is $4.38 per share, with a 12-month target price on the stock of $86, for an annualized gain of about 10 percent. There is also an indicated dividend yield of 2.59 percent.

Note to Readers: I will again be teaching two courses for Ringling College’s Lifelong Learning Academy – Introductory Investment Analysis and Portfolio Management. Classes begin on September 25 and run every Monday for 8 weeks. Call 941-309-5111 or go to www.RCLLA.org.

Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.