Walmart stock is just not appealing
Forget about the People of Walmart (WMT), the website that shows some, er, unflattering photos of people shopping at the store. The most painful sight for investors is the stock.
Shares of the nation’s biggest retailer are down 19% this year — including a 3% drop to $69.67 Tuesday after the company reported a disappointing adjusted profit share of $1.08. That missed expectations by 3.6%.
But missing earnings forecasts for the second quarter in a row isn’t the true problem facing the retailer — at least not in the eyes of investors. Instead, there are two troubling financial developments at the company that investors are keying on:
Declining return on eq
uity. Investors looking for a scorecard on management fixate on return on equity. The measure shows how much profit the company is driving from the money plowed into the business by stock owners. This measure of Walmart’s performance has been steadily dropping the past three years, falling from 23% in the fiscal year ended Jan. 31, 2013, to 19.8% in the past 12 months, S&P Capital IQ says. It’s another way to see how the company isn’t driving the profit out of the business that investors had come to expect in years past.
Anemic revenue growth. If there’s a source of many of Walmart’s woes, it starts at the top line. Revenue inched up just 1.1% during the past 12 months — the lowest revenue growth at Walmart since the 12 months ending January 2010. Revenue growth has been steadily falling, dropping from 5.8% in fiscal 2012.
Falling revenue growth creates problems, even as Walmart is actually holding the line on its core profitability. Walmart kept 24.9 cents on every dollar of revenue after paying direct costs including merchandise over the past 12 months. That’s practically identical to the 25.3 cents on every dollar the company kept in the 12 months ended Jan. 31, 2011, S&P Capital IQ says.
Overhead isn’t the problem, either. Walmart kept 3.3 cents of every dollar of revenue after paying continuing operations. That’s about the same as in 2011, when Walmart kept 3.8 of every dollar from continuing operations.
If there’s good news, it’s that these negatives are well-known and baked into the stock price. Research firm New Constructs, which evaluates stocks based on their price compared with the present value of expected cash flow, rates the stock “attractive.”
But many investors aren’t convinced yet.
Analysts rate the stock a “hold” on average. Analysts do have an 18-month price target of $78.65 a share, though, which would be 13% upside if correct.