Why You Should Buy The Dip In Walmart Stock
After a 10% drop in Walmart stock, we believe it is a buy.
Feb 20 2018
Walmart Stock Price as of Publication: $91 per share.
While the multiple is at its highest since 2017, it is still well below the 2013-2016 levels. Now the question is; can FCF grow further from this point? While that may be hard to answer right now, we believe that e-commerce growth can trigger FCF expansion over the long-term. The reason we think so is that we expect Walmart's e-commerce margins and capital expenditures to be much lower than that of Amazon's given the strong footprint of Walmart's warehouses into account. For instance, Walmart does not need to open big warehouses and fulfillment centers as Amazon did, the company just needs to integrate its stores with its e-commerce platform which needs some time but can be done with a much lower cost.
Walmart management guided for a 40% growth in e-commerce sales in 2018, closed 63 clubs in the quarter, and also decided to slow down growth in stores and clubs in order to focus on e-commerce. This means that we should expect lower capital expenditures in the future which implies higher FCF.
We still believe that Walmart has a good chance of overthrowing Amazon as the "Star of Retail" given the strong store presence it has. Growing online presence is much easier than growing store traffic as the latter requires time and effort by customers. Thus, as Walmart has the upper hand in the offline retail segment, it has the advantage of quickly expanding its online presence through strong digital marketing only, unlike Amazon which does not have any significant offline presence.
Last but not least, the combination of strong online/offline segments for Walmart means that it has higher ability than Amazon to negotiate prices with its suppliers. Don't forget that Amazon is already pushing its payments to its suppliers to the limit; Amazon pays its supplier in 70 days on average while Walmart pays in 40 days.
As a result, we believe that Walmart has higher leverage than Amazon in taking market share in the online segment. While a 40% growth in e-commerce is not impressive on its own (given that Amazon is still growing at that rate), the ability of Walmart to improve its online presence in a more comfortable way than Amazon (from a cash flow, lower valuation, and pure focus on retail perspectives), makes Walmart one of our best picks for retail.
We rate Walmart as a "buy".
