WalMart $20 Billion Dollar BuybackWMT), the world's largest retailer, saw their shares tank after jolting financial market after forecasting between a 6 to 12% drop in earnings for fiscal year 2017. This resulted in the company losing over $20 billion in its market cap in a single day. It has been nearly 20 years since Walmart's shares have tanked by over 10%. The drop in Walmart market cap has resulting in Amazon (AMZN) having a larger market cap. The company's investments in employee wages and e-commerce is taking its toll of the company's bottom line.
Walmart has made it clear that its sales will be flat for the next few years which investors and the market didn't take very well. The CFO and Executive Vice President Chuck Holley of Walmart said that the company's sales growth for the next few years will between 3% to 4% annually. This will add between $45 to $60 billion over the next few years in revenues for Walmart. Mr. Holley said that next year will be the company's heaviest period resulting in $1.5 billion in operating earnings impairment.
Walmart increasing the minimum wage for its works to $9 an hour this year, and next year to $10 an hour is going to cost the company $2.7 billion over the next two years. This will cause the company's earnings to contract and Walmart won't see its earnings rebound until 2019. Clearly Walmart waging its workers hourly wages to $9 and than $10 is going to impair the company underlining earnings for the next few year. Walmart is doing a good thing by paying their workers more money, however, I believe the company will most likely start to lay workers off and reduce their hours to lower cost and make Wall Street happy.
This has created opportunities for rational investors to purchase shares in Walmart at below its intrinsic value. Walmart is a great long-term investment, but over the next few years shares may fall below $60, which is a great thing for me, an off rational investor, who will be able to pick up shares on the cheap. The company is selling for 11x its earnings, has a clean balance sheet, lots of cash and a $20 billion repurchase program in place. Over the last ten years Walmart has earned a average $25 billion in operating operating or $8.05/share. At 10x its operating earnings, Walmart stock would sell for $80.50/share. I believe that Walmart will be able to produce at least $25 billion in operating earnings over the next few years.
Today you can purchase a stake in Walmart for 8x its 10 year average operating earnings. Walmart is a wonderful company selling at a far more wonderful price.
Published on Oct 20, 2015By Cody Eustice
Posted in ...Market Commentary