Author Topic: WMT - Walmart Inc  (Read 53770 times)

rpadebet

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Re: WMT - Walmart Inc
« Reply #60 on: October 29, 2015, 10:55:36 AM »
dwy000,
I think we discussed this earlier this year in the AMZN thread, when AMZN was trading around $300 and WMT around $85-90. ;)

I don't want to put too much stock in short term performance, but I agree at current prices the odds have shifted a bit. AMZN is higher and WMT is lower, but if you hold for long term, current price wouldn't matter as much to the return you would eventually realize. As Charlie Munger pointed out, in the long term an investors return would tend towards the return on the incremental capital investment either company makes from here on.

On the other hand,  if you are playing for a short term mean reversion of both valuations, then I won't argue. I will play that too if the relative valuations get that skewed. :)

Btw, to compare apples to apples, you would need to take off about 50-70b off the market value of AMZN attributable to AWS. WMT isn't in that business. Then compare the Gross merchandize value sold annually at each (AMZN's GMV should be adjusted for 3p sales where they only book a % margin instead of the entire sale amount as revenue). AMZN might appear relatively expensive even by that retail EV/GMV metric, but adjusted for growth prospects and reinvestment opportunities, it is reasonable in my opinion.

To be totally honest, WMT is no chump. I don't think they will be rolled over that easily, but the tail winds AMZN has (secular 15% ecommerce growth and AMZN taking market share within that, ease of global expansion for e-commerce players as opposed to B&M stores) is just too strong.

Scary thing for WMT and even other non-retailers is Bezos is a reinvestment machine. He doesn't care about current reported profts or evidently current cashflows as much (although in his letters he asks investors to focus on cash flows). He will reinvest as much as he can and fast as he can, if there is market share to be taken. In all honesty, I think an unstated goal of AMZN's is to get as close to 0 reported profts as possible each quarter. I too didn't appreciate this sort of capital allocation until I read about John Malone's methods.

Bezos is already building the second leg of the stool in AWS (retail being the first leg). He is now getting started on the 3rd leg - Media and advertising. AMZN could easily be bigger than AAPL if Bezos doesn't get hit by a bus in the near future.

AMZN has a founder-owner-operator and that is an advantage in itself. I guess if Sam Walton were alive and still running WMT, I would have loved to see these two aggressive businessmen compete. That would be a fight worth paying for.

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


dwy000

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Re: WMT - Walmart Inc
« Reply #61 on: October 29, 2015, 12:26:29 PM »
rpadebet - congrats on the share price doubling. Getting good investment gains is really hard so regardless of the reason for it I commend it! 

So what's your intrinsic value of AMZN?  If value investing is by definition buying something below intrinsic value, what do you see that value as for Amazon?  It certainly can't be cheap at any price, right?  Why was it cheap at $300 and still cheap (but less so at $600)?  I can't for the life of me figure out the math.

Can you also point out how you are calculating ROIC?  Amazon has no cash return (well, $600M after cap leases but not subtracting stock based comp). 

Picasso

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Re: WMT - Walmart Inc
« Reply #62 on: October 29, 2015, 12:28:47 PM »
I'm also curious how he gets positive working capital requirements. WMT has had massive nevative working capital forever.

rpadebet

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Re: WMT - Walmart Inc
« Reply #63 on: October 29, 2015, 01:41:55 PM »
I'm also curious how he gets positive working capital requirements. WMT has had massive nevative working capital forever.

Picasso,
I am sorry, I may have got things mixed up. Yes WC is negative for WMT. I was referring to the cash conversion cycle which we discussed on the AMZN thread as well. (it has been negative for AMZN and low positive for WMT)  See the comparative charts in the link below to get an idea of difference in WC management efficiency inherent in the business models. It is also mainly because they take longer to pay their suppliers.

http://www.forbes.com/sites/ycharts/2012/03/10/the-cash-conversion-cycle/

dwy000,

It is really tough to sense sarcasm on internet message boards, but I do sense a little bit in your post. Your instinct maybe right, I might have just gotten lucky. It is difficult to separate luck from skill in a bull market anyway.

@300 AMZN was obviously cheap in my opinion when I valued it as described.
@600 it is clearly not as cheap. All I am saying is it might not be as overvalued as people here seem to suggest.If they continue to execute as they have, few years from now there is a good chance even 600 might prove cheap.

Regarding your question about ROIC calculation - I estimate it by looking at growth in BV per share.
It was 6.24$ as of dec-2008 and 26.5$ as of end of Sep-2015. It has compounded at 24% approximately in this period

Now do the same for WMT - 16.71$ in 10/2008 to 24.53 in 7/2015 (all my data is according to Factset). That is a 5.85% compound. Adjust this for the dividends paid and you will get a compounding close to 8-9%.

Obviously future returns will depend upon what rate each company is able to compound in the future. Make what you will out of this, I just think Bezos can reinvest at a better tax adjusted rate than I can from any cash WMT might throw my way.




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

dwy000

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Re: WMT - Walmart Inc
« Reply #64 on: October 29, 2015, 02:15:54 PM »
No sarcasm there at all.  I sincerely congratulate you or anyone else who had the guts to take a position in Amazon at $300 and get a double out of it.  Now, I'm not kicking myself for sitting on the sidelines as I often do when I miss a big move, because I still don't understand the rationale behind it. 

To your point that it was cheap at $300 in your opinion (and less so now), what was the intrinsic value calculation that you made to get that view?  This is not meant as a "gotcha", it is a legitimate question to see what I'm missing. 

From the original discussion on the Amazon board to now, I haven't seen anyone do a realistic intrinsic value calculation that justified the investment.  It was always based on the argument that Amazon will be bigger tomorrow than today and revenues will grow for a long time.  Well, okay, yeah but that doesn't mean it's cheap.  Whenever I tried putting numbers behind it, there was no scenario that was even close to realistic that PV'd back to being a value based investment. 

johnny

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Re: WMT - Walmart Inc
« Reply #65 on: October 29, 2015, 02:23:31 PM »
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.

Thanks for the thoughts. I appreciate what you have to say, but I have a problem with these two statements.

The first is that if you look at domestic Walmart same-store sales for the past FIVE years, here is what you find:

2011: -1.6%
2012: +0.2%
2013: +1.8%
2014: -0.6%
2015: +0.5%

That is a five year picture, so if you are projecting that Walmart is on track to add $500 billion more annual sales, I think your theory for how that happens needs to reconcile the glorious future with the mediocre past.

On management's shareholder-friendly cashflow policies: in this case I think it is coming from a position of weakness and not strength. Look at how the stock has been absolutely punished in the past few months. Why did this happen? Because management indicated that EPS would drop slightly next year while they invested more into the business? What does this say about the sort of shareholders that have been attracted to the company?

Since management's options probably just got completely smashed by this recent sell-off, how does this experience shape management's incentives going forward? Why should they ever again subordinate short-term EPS to long term strategic goals? I'd be very afraid that they will have learned their lesson here, and will never again do something so stupid.

I am reminded of Dell here: I believe that Dell spent more money on share repurchases than it earned during its entire existence as a public company. This didn't work out very well for most of the investors involved, even though a lot of those repurchases were at bargain prices, from a FCF yield perspective.

That said, I think the decay of Walmart is likely to be slow, and there is a very good chance that a buyer at today's prices will have more than a few nice exit opportunities. So I'm not here to hurt anybody's feelings about it. I just think that it is a little too easy to adopt an overly simplistic "here's a business I understand" thesis with Walmart, while simultaneously writing off Amazon as "too complicated".

You may find Dreadnoughts to be straightforward and easy to understand, and you may even be able to buy them at bargain prices. But if somebody else is spending all of their time building U-boats, you could still end up with a very mediocre outcome.
« Last Edit: October 29, 2015, 02:27:53 PM by johnny »

Picasso

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Re: WMT - Walmart Inc
« Reply #66 on: October 29, 2015, 02:47:35 PM »
Walmart is going to represent some relatively fixed percentage of the overall economy, whether that is 5, 10, or 20 years from now. Rather than just look at SSS, look at sales per share from 2011 to 2015 and now include another $20 billion of share purchases and another $20 billion of dividends the next three years. That alone is worth at least $12 on a $57 stock. Is the remaining business really worth only $45?  As a WMT shareholder you are going to own a large part of the economy and increasingly more over time based on reinvesting those capital returns.

As time goes on either they find a way to maintain or grow SSS as the economy grows or they are going to run into some negative operating leverage. So far we have not even seen evidence of big drops in SSS.  Will that happen and we suddenly find WMT trade for 5x earnings?  Because that is pretty much the only way you lose investing at this price.

Investors are assuming that a rapidly rising Amazon stock price while Walmart reinvests capital (funny how Amazon spending money means growth but Walmart spending capital means destruction) and lowers guidance points to the demise of shareholder returns. If Walmart is indeed doomed to poor returns then so if everyone else and you guys are going to be extraordinary rich from Amazon.  You will have then finally  seen mostly everyone else go out of business and Amazon can finally start pulling in higher margins. 

Nevermind the fact that Amazon issues a ton of stock at half the price it trades for today and you won't call that an expense.  I suspect we are going to see some more "Buffett lost his marbles investing in WMT, KO, etc" fairly soon. 

Schwab711

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Re: WMT - Walmart Inc
« Reply #67 on: October 29, 2015, 03:31:51 PM »
I'm still looking into WMT but I agree with Picasso, there is a lot to like! AMZN has AWS but I really like WalmartLabs, Sam's Club, WMT Mexico, property ownership (obligatory mention of REIT potential), and WMT's market share lead in grocery. It blows my mind that WMT has negative WC! There are dozens of >$1b companies that list WMT as their top customer by a country mile.

If WMT takes some risks with their online site then I could see them steal share. A video/streaming partnership seems likely at some point if they don't already have some. There are still a lot of things I think WMT does better than AMZN because of their distribution network and brick-and-mortar stores (grocery, furniture, clothing/baby stuff, ect). I don't have much more to add right now.

Picasso

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Re: WMT - Walmart Inc
« Reply #68 on: October 29, 2015, 03:35:09 PM »
I mentioned this to someone else but if WMT trades for 10x, they can start creating a REIT at a 5-6% cap rate versus the 10% earnings yield the stock trades for.  900mm square feet of real estate gives them a lot of protection.

Anyway who knows if they do it or not but those assets are real and you can unlock them if necessary. 

valueinvesting101

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Re: WMT - Walmart Inc
« Reply #69 on: October 29, 2015, 03:52:56 PM »
I'm still looking into WMT but I agree with Picasso, there is a lot to like! AMZN has AWS but I really like WalmartLabs, Sam's Club, WMT Mexico, property ownership (obligatory mention of REIT potential), and WMT's market share lead in grocery. It blows my mind that WMT has negative WC! There are dozens of >$1b companies that list WMT as their top customer by a country mile.

If WMT takes some risks with their online site then I could see them steal share. A video/streaming partnership seems likely at some point if they don't already have some. There are still a lot of things I think WMT does better than AMZN because of their distribution network and brick-and-mortar stores (grocery, furniture, clothing/baby stuff, ect). I don't have much more to add right now.

Is it worth for WMT to have high payable on their books? They basically hold this inventory for free but their supplier get paid later. So supplier must be financing these funding gap with short term borrowing. So now you have

supplier cost + short term borrowing cost = supplier COGS
Supplier sale price (WMT COGS) - supplier COGS = profit.

I guess WMT borrowing cost would be lower than supplier's borrowing cost. Does it make sense for them to push this financing to supplier? Can WMT pay them immediately with short term borrowing on WMT's book but get even lower COGS?