Stock of the week - Walmart (21.02.2024)

• Walmart reported fiscal-Q4 earnings on Tuesday
• Results were better all across the board
• Outlook for fiscal-Q1 and fiscal-2025 in-line with expectations
• Walmart to acquire Vizio Holdings for $2.3 billion
• A look at valuation
• Stock surges to fresh all-time highs

Walmart (WMT.US) reported fiscal-Q4 2024 earnings report earlier this week. Results were much better-than-expected and company's stock recorded the biggest single-day jump since November 2022. Company confirmed acquisition of smart TV maker Vizio and lifted annual dividend by 9%. Let's take a look at earnings report from Walmart and company's valuation!

Fiscal-Q4 results beat all across the board

Earnings report from Walmart was solid to say the least. Company reported net sales that were over $2 billion higher than expected, and over 5% higher compared to a year ago period. Walmart said that its e-commerce revenue exceeded $100 billion during full fiscal-2024 (calendar February 2023 - January 2024). Q4 Gross profit, EBITDA, operating income and net income were all much higher than expected. However, net income was still 12.5% lower than in fiscal-Q4 2023, with diluted EPS dropping to $2.03 from $2.32 a year ago. 

While earnings forecast for the current fiscal quarter was slightly weaker than expected, full-year forecasts more or less matched expectations.

Fiscal-Q4 2024 earnings (calendar November 2023 - January 2024)

• Revenue: $173.39 billion vs $170.66 billion expected (+5.7% YoY)
  • United States: $139.49 billion vs $140.22 billion expected (+3.2% YoY)
  • International: $32.42 billion vs $30.58 billion expected (+17.6% YoY)
• Net sales: $171.91 billion vs $169.69 billion expected (+5.6% YoY)
• Gross profit: $41.56 billion vs $40.48 billion expected (+7.6% YoY)
• Gross margin: 23.12% vs 23.34% expected (23.93% a year ago)
• Operating income: $7.25 billion vs $6.79 billion expected (+13.2% YoY)
• Operating margin: 4.18% vs 3.98% expected (3.39% a year ago)
• EBITDA: $10.37 billion vs $9.79 billion expected (+12.5% YoY)
• EBITDA margin: 5.98% vs 5.85% expected (5.10% a year ago)
• Pretax income: $6.73 billion vs $6.26 billion expected (+14.7% YoY)
• Net income: $5.49 billion vs $4.46 billion expected (-12.5% YoY)
• Net margin: 3.17% vs 2.48% expected (3.83% a year ago)
• Diluted EPS: $2.03 vs $1.64 expected ($2.32 a year ago)
• Adjusted EPS: $1.80 vs $1.65 expected ($1.71 a year ago)

Fiscal-Q1 2025 forecast

• Adjusted EPS: $1.48-1.56 vs $1.60 expected
• Net sales growth: 4-5% YoY

Full fiscal-2025 forecast

• Adjusted EPS: $6.70-7.12 vs $7.09 expected
• Net sales growth: 3-4%

Financial dashboard for Walmart (WMT.US). Source: Bloomberg Finance LP, XTB

Vizio Holding acquisition, opening new stores

Apart from reporting results for fiscal-Q4 2024, Walmart also announced that it will acquire Vizio Holdings, US smart TV maker, for $11.50 per share in cash, or approximately $2.3 billion. This confirm media reports that surfaced last week and hinted that talks are ongoing between the two. Acquisition is said to be aimed at boosting Walmart advertising capabilities through Vizio's customer-focused operating system. 

Company also plans to resume opening new stores in the United States, with a Wall Street Journal report from end January saying that Walmart plans to launch or expand 150 stores in the country over the next five years. This would be a change as the company hasn't been opening new stores recently and instead was shutting down current ones. 

An overall strong Q4 earnings report from Walmart and solid outlook for the future was met with investors' optimism. Stock surged 3.2% during the post-earnings trading session. While this may not look like much in times of massive volatility of tech stocks, this was the biggest single-day jump for Walmart since November 2022.

Walmart's post-earnings jump was the biggest single-day share price increase since November 11, 2022. Source: xStation5

What impact will 3-for-1 stock split have?

Walmart announced at the end of January that it will perform a 3-for-1 stock split in February. Shareholders who held the company's share at the close of business on Thursday, February 22, 2024, will be eligible, while shares will begin to trade on a post-split basis on Monday, February 26, 2024.

Stock splits themselves have no impact on the value of shareholders' positions. However, Walmart's stock split may actually result in some downward pressure on the stock. Walmart is a member of the Dow Jones Industrial Average index, which is a price-weighted index where prices of individual securities play a role in determining weight in the index. As a result of split-related decrease in share price, Walmart's weight in the index will shrink, and it could encourage some stock selling from index-tracking funds.

A look at valuation

Let's take a quick look at Walmart's valuation with 3 often used valuation methods - DCF, multiples and Gordon Growth Model. We want to stress that those valuations are for presentation purposes only and should not be viewed as recommendations or target prices.

Discounted Cash Flow (DCF) method

Let's start with probably the most popular fundamental model for valuing stocks - Discounted Cash Flow method (DCF). This model relies on a number of assumptions. We have decided to take a simplified approach and base those assumptions on averages for the past 5-years. Detailed forecasts for 10 years were made, with terminal value assumptions being set as follows - 2.5% terminal revenue growth and 6% terminal weighted cost of capital (WACC). Such a set of assumptions provides us with an intrinsic value of Walmart's shares of $198.35 - or over 14% above yesterday's cash close. Terminal value forecast accounts for almost 74% of DCF valuation.

A point to note is that the intrinsic value obtained via the DCF method is highly sensitive to assumptions made. Two sensitivity matrices are provided below - one for different sets of Operating Margin and Revenue Growth assumptions and the other for different sets of Terminal WACC and Terminal Revenue Growth assumptions.

Source: Bloomberg Finance LP, XTB Research

Source: Bloomberg Finance LP, XTB Research

Multiples valuation

Next, let's take a look at how Walmart's valuation compares with peers. We have constructed a peer group consisting of Costco Wholesale, Target, Dollar Tree, Dollar General, Kroger, Big Lots, Lowe's, Home Depot and Kohl's. We have taken a look at 6 different valuation multiples - P/E, P/BV, P/S, P/FCF, EV/Sales and EV/EBITDA.

Taking a look at the table below, we can see that there is some volatility in multiples for Walmart peers, especially in the case of P/BV multiple, with Home Depot being a clear outlier. We are providing valuation calculated using both mean and median, but medians seem to be less distorted. Using median multiples provides us with valuations ranging from $112.62 in case of P/E multiple to $229.74 in case of EV/Sales multiple. A trimmed mean (excluding the highest and lowest valuations) provides us with an intrinsic value of $147.72 per share, or around 15% below yesterday's cash closing price.

Source: Bloomberg Finance LP, XTB Research

Gordon Growth Model

Walmart announced a 9% increase to its annual dividend, the largest such increase in over 10 years. As a company with a long track record of dividend payouts and which has been increasing dividends for over 50 consecutive years, Walmart can be valued used a Gordon Growth Model - valuation method based on dividends. While company's dividend growth in recent years was 1.5-2%, a 9% increase announced for this fiscal year suggests that the company may rise payouts quicker amid continued consumer strength. We have assumed an 5% dividend growth rate as well as 6.4% required rate of return. Running a model with such assumptions leads us to an intrinsic value of $186.39 per share, or around 7.3% above yesterday's closing price.

As it is usually the case with valuation models, the Gordon Growth Model is also highly sensitive to assumptions made. Sensitivity matrix for dividend growth and required rate of return assumptions is provided below. Green tiles show combinations that result in above-market valuation, and red tiles show combinations that result in below-market valuations.

Source: Bloomberg Finance LP, XTB Research

Stock surges to fresh all-time highs

Walmart launch post-earnings trading session on Tuesday with a bullish price gap and reached fresh record highs above $180 mark. However, bulls failed to hold onto those gains and stock finished Tuesday's trading slightly below the opening price. Pullback continued on Wednesday, with stock now trading over 4% below intraday all-time highs from Tuesday. Nevertheless, it continues to trade above pre-earnings levels.

Walmart at weekly interval (W1). Source: xStation5