Author Topic: WMT - Walmart Inc  (Read 53933 times)

valueinvestor82

  • Full Member
  • ***
  • Posts: 112
Re: WMT - Walmart Inc
« Reply #50 on: October 28, 2015, 06:46:53 PM »
I appreciate your thoughtful response. The problem is, Amazon spends roughly 10% (WACC) to earn 5%, and the highly touted "AWS" doesn't make the money that they claim. Fulfillment centers won't change the fact that they suck at being a PROFITABLE low cost retailer. They sell items at losses, the numbers show this. So I think Walmart will simply need to outlast their ability to have massive debt financings every few years as their assets reach their 3-4 year end of their useful lives (see end of 2014 financing) and wait for stock to be insufficient to pay employees, and Amazon will gradually end up being something different than it is today, if it is to survive.

I am both an Amazon customer and a Walmart customer, and I know that I will stop using Amazon the moment I can get the same price on my purchase along with immediate gratification by driving a few blocks down the street.
« Last Edit: October 28, 2015, 06:48:47 PM by valueinvestor82 »


Parsad

  • Administrator
  • Hero Member
  • *****
  • Posts: 8683
Re: WMT - Walmart Inc
« Reply #51 on: October 28, 2015, 10:12:25 PM »
Amazon is going to eat Walmart's lunch one day...12-15 years from now!  So if you plan on holding Walmart for 20 years, you might be in trouble. 

Now, I don't know how many times I've said this before, but there is a big difference between the long-term viability of a business and whether it is a good short-term investment.  In this case, without hesitation, only a fool would believe that Amazon is the better investment based on valuation, fundamentals, revenue, earnings, cash flow and net profit. 

I'm sure self-driving cars are going to significantly impact Geico's business one day, but is that going to make Geico unprofitable over the next 10-15 years?  Probably not.  Cheers!
No man is a failure who has friends!

johnny

  • Sr. Member
  • ****
  • Posts: 421
Re: WMT - Walmart Inc
« Reply #52 on: October 29, 2015, 07:56:23 AM »
Yeah, there is definitely a price where it makes sense to buy a company that is going to slowly die, but that's not the sort of rationale I typically hear invoked when people talk about Walmart. More than anything less, people seem to have a "worst case" scenario of the company where its revenues, margins, and therefore net income simply stagnate and it turns into a perpetual bond.

So if you're comfortable with the idea that Amazon is the future, there two important inputs are:

1. How will Walmarts revenue decay over time? and

2. Will the giant stores and operating leverage come back to haunt Walmart when those revenues start decreasing? How badly will the economics of a given Walmart store be impaired when they lose 10% of their traffic?

Just to break out of bear character for a second, I think a reasonable argument can be made that the Amazon model is not a universal one, and that it only really works at or above a specific population density. And given how much of Walmart's sales originate from rural America, I'd say it is reasonable that those are relatively safe customers for a while. Certainly Amazon's last-mile delivery integration (which forms a pretty important component of my "scale advantage" argument) is limited to only the largest US cities for now.

frank87

  • Full Member
  • ***
  • Posts: 199
Re: WMT - Walmart Inc
« Reply #53 on: October 29, 2015, 08:44:09 AM »
Interesting how people get more negative on a stock and find reasons to rationalize that sentiment when the stock is down.

Picasso

  • Hero Member
  • *****
  • Posts: 2025
Re: WMT - Walmart Inc
« Reply #54 on: October 29, 2015, 08:56:29 AM »
Personally, I think the current price of WMT is insane when you look at valuations across the rest of the market.

You have the low cost retailer doing close to $500 billion of sales.  In ten, twenty years from now WMT is going to crack sales over a trillion.  They actually return 100% of free cash flow back to shareholders.  They have generated large returns on capital for decades. They still generate 12-15% returns on invested capital.  Like Amazon they also have negative working capital.  Free cash flow over the next few years will amount to around $50 billion.  They own close to a billion square feet of real estate.  They have other hidden assets like Walmex.  Less than a couple years ago, the entry of a Walmart store would push up the prices of nearby real estate. 

But the market thinks this is only worth $180 billion, or less judging how the market expects the stock to keep falling.  If Walmart is screwed where else are we supposed to invest?

handycap5

  • Full Member
  • ***
  • Posts: 103
Re: WMT - Walmart Inc
« Reply #55 on: October 29, 2015, 09:05:49 AM »
can someone who owns the stock explain why they find it attractive, possibly including a EPS number something similar a few years out with which they are quantifying the attractiveness?

negative operating leverage at the store level is a scary development. competing against a superior offering who offers lower prices, may have lower costs, and is willing to do so at a lower margin is a scary competitive dynamic. and the impetus to feel like you have to compete by significantly increasing investment is maybe good money after bad (and may come in the form of investment by lower profits). but price is cheap. please help me...

Picasso

  • Hero Member
  • *****
  • Posts: 2025
Re: WMT - Walmart Inc
« Reply #56 on: October 29, 2015, 09:23:09 AM »
can someone who owns the stock explain why they find it attractive, possibly including a EPS number something similar a few years out with which they are quantifying the attractiveness?

negative operating leverage at the store level is a scary development. competing against a superior offering who offers lower prices, may have lower costs, and is willing to do so at a lower margin is a scary competitive dynamic. and the impetus to feel like you have to compete by significantly increasing investment is maybe good money after bad (and may come in the form of investment by lower profits). but price is cheap. please help me...

I think you have a situation where the market is ignoring the long-term cash generation, assigning some low multiple to what might be trough earnings, and assuming the long-term value of WMT is now impaired.   That's not how I'm looking at the stock.

Rather just look at how much cash they can return to shareholders over the next several years and then the next decade and decade after that.  Even if they never grow the same way again and exhibit flat/slightly declining earnings you're going to get your entire investment back in less than ten years.  And if this is a short-term issue (which it probably is) then you're going to make a lot of money over time and this is not the kind of stock you have to worry about selling.

There are easy things WMT can do to fix the problem.  Clean up the stores, pay their employees better, make it easier and faster to shop in their stores, etc.  And the spend necessary to fix that is what is causing the drop in EPS for the next few years.  The Amazon effect is debatable but I think that most investors have no idea how the majority of the world shops.  Most people in this country are not as affluent as most of us investors.  So I can see why people want to value Amazon at over a hundred billion over WMT (with no operating profits when adjusting for various things) because it's easier to see the Amazon packages at your neighbors house and the massive growth in revenue. 

If I told you the catalyst to see better earnings will come in three years, would you buy the stock?  Most investors would not.  But for someone with a time horizon longer than a few years you can take advantage of the fact that 95% of the market no longer has the patience to wait that long.  And so you have a situation where the current price on WMT stock dramatically undervalued the long-term cash that will be generated on that share price.  EPS in a few years is irrelevant.

Obviously the market disagrees with me.

rpadebet

  • Hero Member
  • *****
  • Posts: 726
Re: WMT - Walmart Inc
« Reply #57 on: October 29, 2015, 09:44:36 AM »
I maybe going up against the opinion of some very experienced investors here but I think AMZN will eat WMT's lunch soon unless they get their business model re-oriented. There has been some discussion on this in the AMZN thread but the key reasons why AMZN is a better investment than WMT long term are as follows

a) AMZN has developed a better mouse trap for the future. To give a early 20th century analogy, WMT is the best buggy whip manufacturer going up against AMZN's cars.

b) Negative WC for AMZN as opposed to low but positive for WMT. Negative WC is form of float, so returns are levered without taking on actual debt. This float grows as long as AMZN grows (like GIECO float) whereas WMT has to invest in WC to grow.

c) this is the most important- AMZN is still able to deploy all the cash they generate internally at very high ROIC's. WMT generates a lot more cash admittedly, but pays it out, as reinvestment opportunities in their business model are limited. For an investor AMZN's tax efficient reinvestment is great as we don't have to pay taxes on cash payouts and then find opportunities to reinvest ourselves. Usually over the long term companies that reinvest internally at high ROIC's tend to perform better than cash cows.

Finally, it is a myth that prices at AMZN are low compared to brick and mortar retailer like WMT. Most times the prices are higher or same. There are 2-3 dynamics at play here though 

 - AMZN given its electronic model can change prices hundreds and thousands of times a day. Try doing this at a WMT store more than once a day (you have to change labels on all aisles- not much fun!)

 - Selection of products - again the nature of the business model at AMZN lends itself to offer an order of magnitude higher selection than WMT. If you want some rare herbal product for some instance, would you rather search through the aisles at WMT or search for it on the AMZN app? This is actually where AMZN can make their margin, not on the consumer electronics which people focus on.

- Convenience - I don't know about others, but as a prime subscriber, unless it is a really beautiful day outside, I find it convenient to order stuff via AMZN store, even if it means I pay a dollar more for cereal or diapers. Driving to the store in rain/snow, finding parking, searching through the aisles, bagging the merchandize and bringing it back home, takes a lot more work and time than searching online, clicking to add to your cart and get things delivered to your doorstep in 1-2 days. (then i can spend the time researching why amzn is better than wmt :) )


You can't connect the dots looking forward you can only connect them looking backwards. So you have to trust that the dots will somehow connect in your future. You have to trust in something: your gut, destiny, life, karma, whatever.
                       - Steve Jobs

Picasso

  • Hero Member
  • *****
  • Posts: 2025
Re: WMT - Walmart Inc
« Reply #58 on: October 29, 2015, 09:51:36 AM »
Where do you see positive working capital on WMT?  Maybe we're calculating it different ways.

dwy000

  • Hero Member
  • *****
  • Posts: 585
Re: WMT - Walmart Inc
« Reply #59 on: October 29, 2015, 09:58:37 AM »
I maybe going up against the opinion of some very experienced investors here but I think AMZN will eat WMT's lunch soon unless they get their business model re-oriented. There has been some discussion on this in the AMZN thread but the key reasons why AMZN is a better investment than WMT long term are as follows

a) AMZN has developed a better mouse trap for the future. To give a early 20th century analogy, WMT is the best buggy whip manufacturer going up against AMZN's cars.

b) Negative WC for AMZN as opposed to low but positive for WMT. Negative WC is form of float, so returns are levered without taking on actual debt. This float grows as long as AMZN grows (like GIECO float) whereas WMT has to invest in WC to grow.

c) this is the most important- AMZN is still able to deploy all the cash they generate internally at very high ROIC's. WMT generates a lot more cash admittedly, but pays it out, as reinvestment opportunities in their business model are limited. For an investor AMZN's tax efficient reinvestment is great as we don't have to pay taxes on cash payouts and then find opportunities to reinvest ourselves. Usually over the long term companies that reinvest internally at high ROIC's tend to perform better than cash cows.

Finally, it is a myth that prices at AMZN are low compared to brick and mortar retailer like WMT. Most times the prices are higher or same. There are 2-3 dynamics at play here though 

 - AMZN given its electronic model can change prices hundreds and thousands of times a day. Try doing this at a WMT store more than once a day (you have to change labels on all aisles- not much fun!)

 - Selection of products - again the nature of the business model at AMZN lends itself to offer an order of magnitude higher selection than WMT. If you want some rare herbal product for some instance, would you rather search through the aisles at WMT or search for it on the AMZN app? This is actually where AMZN can make their margin, not on the consumer electronics which people focus on.

- Convenience - I don't know about others, but as a prime subscriber, unless it is a really beautiful day outside, I find it convenient to order stuff via AMZN store, even if it means I pay a dollar more for cereal or diapers. Driving to the store in rain/snow, finding parking, searching through the aisles, bagging the merchandize and bringing it back home, takes a lot more work and time than searching online, clicking to add to your cart and get things delivered to your doorstep in 1-2 days. (then i can spend the time researching why amzn is better than wmt :) )

That's all great but why does that make Amazon a better investment today?  Some would argue that everything you've pointed out and more has already been priced into the stock.  The assumptions on growth, margin expansion and reduced spending (which are contrary to each other) that are required to ultimately generate the cash flows that would justify todays price are hardly realistic.

I also think the idea that WMT, Target, Costco, Kohls, Macy's, Jet and everyone else will just stand still and let the market slip away from them is somewhat na´ve.  They may be slow and cumbersome but they bring a lot of resources and customers to bear.