By Chaoran
I
meant to write about WMT on its 10% drop earlier in the week, but threw
it away since I really had no great insight on WMT. In the short term I
could see it go either way: there could be a short term snap back with
traders trying to make a quick 5-10%; or it could go down further due to
disappointment and people throwing up hands with tepid projections from
the company for the next 3-4 years. So I really have no idea if your
intention is to have a short term play for the next 12 months or so. If
instead you want to have a relatively long term assessment of WMT as an
investment for the next 3-5 years or longer, I would offer a few of my
personal views: 1. There is limited downside at the current valuation
level: WMT is trading around 12-13 times of earnings. 2. The upside
depends a lot on executions for the next 2-4 years. There are big
uncertainties in management's ability to execute their plans to
transform the company. They may or may not succeed. 3. Even if they
succeed, you are looking at flattish earnings for the next 3-4 years,
taking their projections at face value. It would require a lot of
patience. Sure, you're getting paid a 3% dividend while waiting. But if
their plan doesn't pan out as a decent success, would you be satisfied
with something like 5% a year for the next 3-5 years? Now if it
succeeds, what kind of return can you expect for the next 5 years? Let's
assume its earnings stay flat for the next 3 years and its PE multiple
also stays flat at 12.5. So you only collect 3% a year in dividends for
the next 3 years. After 3 years, assuming WMT gets back to higher
growth. But how high? WMT has averaged EPS growth about 7.5% a year for
the last 10 years, but virtually no growth for the last 3-4 years.
Realistically, I don't think WMT could be expected to grow more than
7-8% a year on a normalized basis, given its size and a host of other
issues (e.g., higher compensation costs going forward, limited ability
to expand domestically, less profitability internationally), even if
they turn around successfully. Let's assume WMT does get back to 7.5%
growth in EPS after 3 years. What kind of PE multiple does it deserve?
Well, it should be higher, perhaps 15-17. Let's say it's 16. Right there
you get a markup of about 28%. So that's about 28%/3=9% a year. Adding
the 3% a year in dividends, you get 12% a year for the first 3 years.
Not bad! But that's only if they succeed. A big if, though. Let's say
that's the case. After the next 3 years, you will just get something
like 7.5%+2.5%=10% a year. I'm assuming a more normalized dividend of
2.5%, since at higher PE multiple the dividend yield will be lower. All
in all, it appears the best scenario is to earn you 10-12% a year if you
hold it for the next 5+ years. If WMT fails to execute its
transformation plans, your return will be quite unsatisfying. Could WMT
get back to faster growth like 10+% a year? Not impossible, but not
something I want to bet on.
I like this rather comprehensive analysis and also very much agree with the conclusion that WMT is not likely to get back to fast growth in the foreseeable future. Having said that, I'd like to offer some ideas about trading and investing in WMT from a different perspective.
With respect to trading for short-term, I do believe WMT is likely at or near its bottom at least for now. The sentiment for WMT is understandably extremely poor and almost no one wants to touch it anymore. This is the time when a bottom, not the top, is near or reached. Technically WMT is quite oversold and offers a good opportunity for a quick rebound. Having said that, it is still a falling knife and the overall market is quite risky for a severe decline any day. To minimizing the risk of catching a falling knife, it is better to wait and see some evidence that WMT may have bottomed. One good indicator is that, when the market falls off the cliff, WMT refuses to go down much or even goes up. That's the time to make a bet for its rebound.
So how about the long-term investment? Well it also depends how you would like to put money into it. While I do agree with the above analysis that it is likely that, even if the management has executed the transformation plan well, WMT may still likely stay at a slow growth rate. So if you are looking for an annual return 15% or more, you may not want to invest in WMT at all. However, there is another way to invest for long-term, good for this kind of slow growth companies with good dividends. If you are very patient and not looking for immediate return but for very long-term investment aiming for the ultimate values, then Dividend-Re-Investment (DRIP) is a good way to invest in WMT. I have written DRIP quite often in the past and here is the one which can mathematically prove that you don't need high growth stocks to become rich, as long as you have a very long investment horizon with patience. I think WMT is worth for long-term DRIP investment at this level. There are a few things to consider:
- As discussed in the analysis cited above, WMT is very cheap valuation-wise. After such a historical bloodshed, I don't think WMT will go down much further from here. The extreme dismal sentiment towards its long-term prospects has likely been priced in its price. Short-term it may still fluctuate a lot due to the overall market uncertainty; longer term however, I'd feel more comfortable to establish a position at this level, if you are willing to stay with it with DRIP in place.
- WMT is still generating a lot of cash from its retail business, given its size and presence world-wide. Per the company, it will generate $80 Billion free cash flow in the next 3 years.
- It has decades of track record to pay increasing dividends, a feature important for DRIP. Although it may very likely slow down or even stop increasing dividends in the next few years, given the current rather challenging financial situation, the chance of a dividend cut is highly unlikely since it continues to generate tons of money and its dividend payout ratio is quite low (< 50%). Therefore I think it is quite safe to invest in WMT with DRIP. The aim here is not for immediate return but rather to automatically accumulate its shares as much and fast as possible for long-term. Eventually this will allow you to hit a jackpot with exponential increase of the position value. As such, a low share price is not a bad thing but even beneficial as long as the company is still generating enough cash to pay dividends.
The million dollar question is obviously whether the management can execute the transformation plan well in the next few years. Well, personally I still have good faith in it, given it has gone through numerous challenges since its birth decades ago and this one is certainly not the only one and the last one. I think it will find its way to revive and thrive again. This reminds me of MCD and MSFT few years back till recently when both had been considered dad money for years due to failure to timely responding to the changing environment and trends. But both have finally found their way out. I think we will see the same story for WMT eventually. However, this is only my personal opinion and no one knows for sure what will happen in the future. In case WMT turns out to continue to deteriorate substantially, the DRIP investment for it will not work well. We need a clear exit plan how to handle this unlikely scenario. Here is what I will suggest: don't go crazy to put a lot of money into it but have a reasonable position size. For DRIP the idea is not to bet for one stock with a lot of money but rather aim to create values via DRIP long-term with a relatively small position for each one. With that, use a trailing stop loss that you are comfortable with, e.g. 15-20% so that if WMT is indeed going down to the hell, you can get out without losing too much.
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