WMT Stock Is Undervalued; Here’s Why
There’s no denying that Wal-Mart Stores, Inc. (NYSE:WMT) is in a tough spot. Shares have plunged 13% over the past three weeks. Worse yet, WMT stock has declined by an alarming 31% year-over-year, leading some analysts and investors to steer far clear of the company.
So is it time to join the crowd and dump Walmart? Not necessarily. This is one solid company with strong upside growth potential going into 2016. Let me explain.
2015 Was a Rocky Year for Walmart
You see, while it’s completely true that the Walmart stock price has underperformed in the last few months, focusing on a company’s stock price alone is not the best way to separate the good stocks from the bad. Instead, investors need to dive a little deeper to determine which stocks are worth a second look and this is exactly the case with Walmart.
But before I tell you about the company’s plan to create value for shareholders and why there has never been a better time to take a second look at WMT stock, let’s backtrack a little and establish how Walmart arrived at its current situation.
The international retail giant has struggled this year, as it underperformed on Wall Street earnings estimates in the second and third quarters of 2015. Worse yet, the world’s biggest retailer forecasted slow profit growth for 2016, leading many analysts and investors to start questioning just how far Walmart’s stock price can slide. (Source: “Wal-Mart stock suffering as consumers sit on their wallets,” The Globe & Mail, November 17, 2015.)
Chart courtesy of www.StockCharts.com
While the company doesn’t necessarily sound impressive from a short-term growth perspective, it’s hard to overemphasize just how shortsighted this view really is. All companies go through low periods, but few have the financial resources and strong track record of rebounding out of the occasional dip than Walmart. The WMT stock price has indeed declined by a considerable margin and it is the worst-performing company listed on the S&P 500 at this time. However, this is where things get interesting.
You see, Walmart offers a solid dividend yield of 3.03%, or $0.49 per share, which is a robust one percent higher than the S&P 500 average. And it doesn’t end there, because rather than this being a desperate move by a falling company to create investor interest, Walmart has maintained this same dividend payment for the last five straight financial quarters.
But the company also has an ace up its sleeve, as the retailer has set its sights on a far more lucrative sector than its traditional brick-and-mortar setup. I’m talking about online commerce, and this is one market in which a company with the financial resources of Walmart could very well become a dominant player.
Walmart versus Amazon.com
Walmart could get a huge boost soon, as the company is reorganizing itself to start directly competing with Amazon.com, Inc., which is currently the world’s largest e-commerce platform. (Source: “Wal-Mart Revamps E-Commerce Technology as Amazon Applies Pressure,” The Wall Street Journal, November 25, 2015.)
This latest strategy involves steps to seamlessly integrate e-commerce options into the regular Walmart shopping experience, where customers will be able to pre-order items using their smartphone or PC and pick them up at one of the company’s physical stores. (Source: “Walmart touts e-commerce, mobile growth plans on solid Q3 results,” Fortune, November 17, 2015.)
The advantage of this approach is that in contrast to Amazon, which is an overwhelmingly virtual company with no physical retail outlets that customers can visit (or at least not yet), Walmart has an existing international chain of stores to bind with its plans for an e-commerce platform. Additionally, bringing the two shopping aspects together will have the advantage of lowering overall operating expenses, while increasing total sales volumes. Profit margins will grow as a result and with this growth, Walmart’s stock price will rise.
When you consider the medium- to long-term possibilities of the world’s biggest retailer also becoming the world’s biggest e-commerce platform, the potential for huge upside growth seems limitless. It’s for this reason that when a smart investor takes a good and hard look at WMT stock, it becomes clear that it’s actually quite an undervalued pick at the moment, but it has the potential to soar exponentially in the years to come. Walmart is worth watching.
The Bottom Line on WMT Stock
With the holiday shopping season about to kick into high gear, you can bet that Walmart will be seeing surging sales at all its locations. Any increase in sales will, of course, translate to a heightened financial bottom line for the company, and with it give a substantial boost to the WMT stock price for the fourth quarter of 2015.
Turning to the question of financial performance, analysts’ earnings estimates for Walmart were revised to such a low level for the medium-term that the company could easily beat them if its dive into the e-commerce market proves successful.
The bottom line: now is definitely not the time to bail on Walmart.