Streetwise for Sunday, August 26, 2018

Yes, Walmart should be commended for offering employment to the elderly and disabled. Nonetheless, no one should be forced to spend their golden years working at minimum wage positions to survive.

Investing in equities does help ensure you will not have to. All you need to do is find corporations with winning records of accomplishment to invest in, which brings us back to Walmart (WMT).

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

When I last wrote about the company a year ago, my earnings estimate for fiscal 2018 (Walmart’s fiscal year ends January 31, so we are now in fiscal year 2019) was $4.38 per share, with a 12-month target price on the stock of $86, for an annualized gain of about 10 percent. There was also an indicated dividend yield of 2.59 percent.

So how did the mammoth retail giant do? Earnings came in at $4.42 and the shares recently closed at $ 96.13. However, those numbers do not tell the whole story.

The company’s strong performance can be attributed to their recent successes in partnerships and acquisitions. For example, Walmart announced recently a partnership with Anthem. The partnership will enable Anthem to offer over-the-counter drugs and health services to Medicare customers.

The Walmart-Anthem program, launching in January 2019, will enable those enrolled in Anthem’s affiliated Medicare Advantage plans to purchase OTC medications and health-related items at Walmart’s 4,700 stores and on Walmart.com.

Walmart has also completed a $16 billion investment in Flipkart, an Indian e-commerce company, thereby becoming Flipkart’s majority shareholder.

The Flipkart deal has Walmart taking a 77 percent share in the company, thereby expanding its rivalry with Amazon. Flipkart will continue to be run by its leadership with Tencent and Tiger Global retaining board seats, alongside co-founder Binny Bansal and Microsoft.

Walmart plans to use Flipkart as a “key center of learning” for the rest of its businesses.

With e-commerce keeping its sales numbers moving, Walmart was able to improve its average sales per customer. It has also steadily improved its digital sales channels through acquisitions, as well as moves that include free two-day shipping without membership fee, offering multiple pick up methods, etc.

Walmart reported stellar second quarter operating results. Total revenues rose by 3.8 percent to $128 billion, with a 4.5 percent increase in comparable store sales domestically. Growth has been driven by both traffic and ticket size growth, each about making an equal contribution.

As Walmart delivered its highest organic growth numbers in over a decade, Sam´s Club also had a strong quarter with a 5.0 percent comparable sales growth, its strongest achievement of the past six years.

Nonetheless, operating profits were down from $6.0 billion to $5.8 billion as continued margin pressure remains a dominant theme in recent years.

Of interest is the break-out of the e-Commerce contribution. These businesses combined generate nearly $100 billion in quarterly revenues suggesting that growth of e-Commerce amounts to $1 billion per quarter in actual dollar terms.

In other words, Walmart’s e-Commerce is about a $15 billion enterprise. Of course, that remains a very small number for a business with half a trillion in sales.

A key issue often brought up is the large discrepancy between the loss of $0.29 per share reported on a GAAP basis and adjusted profits of $1.29 per share. The reason – the sale of the activities in Brazil resulting in a $4.5 billion charge.

The intrinsic value of the shares, using a free cash flow to the firm model is $113 per share. My earnings estimate for fiscal 2018 is $4.96 per share, with a 12-month target price on the stock of $105, for an annualized gain of about 10 percent. There is also an indicated dividend yield of 2.13 percent.

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.RuddInternational.com.