Matteo Colombo
Walmart (NYSE:WMT) is a position that is gradually creeping up the “Top 10 Client Position” rankings, mostly from the increase in the stock price as well as purchasing more stock.
The stock is up 48.15% YTD as of August 31 ’24. Not too many sell-side or prominent buy-side investors have been talking about the stock. It’s been a very quiet rally for the retail giant.
This blog’s technician says good support for Walmart resides between $68 – $72 per share, so waiting on a pullback to the low $70s in the stock makes sense.
Here’s a quick summary of the Q2 ’25 Walmart earnings call:
- Both EPS and revenue beat consensus (which isn’t unusual). Quarterly comps of +4.2% were better than expected according to management, since the July ’23 quarter saw a comp of 6% one year ago;
- The operating margin continued to expand 20 bps to 5.70%, which is a healthy margin for Walmart;
- There are two dynamics happening at WMT (in my opinion): using AI, Walmart merchandising is looking to take costs out of the P/L, while new revenue initiatives, like advertising, and data analytics (not sure what that is) are adding higher-margin revenue to the retail giant; (Sell-side tech analysts call this revenue diversification, the “flywheel” and Walmart is developing it nicely).
- Per the conference call notes, global advertising grew 26% y-o-y, including 30% growth y-o-y for Walmart Connect, while US advertising sales driven by marketplace sellers were up nearly 50%. Again, this is higher margin revenue for the retail giant.
- E-commerce is a still a challenge for Walmart, although they are slowly moving closer to Amazon (AMZN) with a real e-commerce presence, the problem is it’s not yet profitable, although from what I can glean from the conference call comments, the e-commerce losses are getting smaller.
- Although Sam’s Club is just 14% of total Walmart revenue and 7% of total operating profit, with an operating margin just half of Walmart US at 2.54% (versus Walmart’s 5.70%), the division is putting up consistently good results, after Walmart parted ways with Roz Brewer several years ago, who went to Starbucks (SBUX), then landed at Walgreens (WBA), and – well – I have no idea where she is now. Sam’s CEO is doing a very good job, and the division has been successfully turned around.
Walmart’s not cheap on a P/E basis, trading at 30x expected ’25 fiscal EPS for expected 10% growth this year and 9% in fiscal ’26. Expected forward revenue growth in the next 3 years is 4%–5%. The thing is, if you look at Walmart’s “cash-flow per share” of $4.19 as of July ’24, the stock is trading at just an 18x cash-flow multiple. Free cash flow per share is very expensive as capex has increased with AI spending and store remodeling, but this will normalize over time.
The point is, if you look at Walmart’s cash-flow multiples over time, they are much lower than the P/E ratios.
The stock is trading at 0.90x revenue, which is a considerable expansion from the 0.6x valuation in late ’22 – early ’23.
Walmart’s on track to print $677 billion in revenue by fiscal January ’25 and $705 billion by January ’26.
Personally, I think Walmart can trade to $100 per share easily with “flywheel” innovation and higher-margin revenue growth, but it will take time, and investors should wait for pullbacks, even though in the last two years, there haven’t been a lot of opportunities to buy the stock on weakness.
The retail giant has been greatly impacted by Amazon and e-commerce since 2010, but in the last 15 years, Walmart has been experimenting with various “omni-channel” strategies, and they are gradually getting it right.
The ironic aspect to the two retail giants, Walmart and Amazon, which are both on schedule to generate $700 billion in sales each by the end of calendar ’25, is that they have been moving closer to each other in terms of retail strategy, with Walmart gradually improving their e-commerce ability, while Amazon with Amazon Fresh, is trying to develop a “bricks-and-mortar” or physical store strategy. Of the two, I do think Walmart is doing a better job with e-commerce, than Amazon is with Amazon Fresh, even though as a retail customer, I patronize both.
Here’s the Walmart earnings preview for the last earnings report in mid-January ’24.
Merck (NYSE:MRK) update
Merck was up 10% YTD as of Friday, August 30 ’24, but had been up as much as 21% at various times through the 2nd quarter, but the Q2 ’24 earnings release put a big dent in Merck, dropping the stock to the $112 – $113 area.
While the sell-side and Morningstar analysts thought Gardasil revenue might be the culprit, what wasn’t said is that Keytruda is due to come off patent in mid-2028, which gives the pharma giant at least three more years to milk the growth from Keytruda, however, some of the patent work that would keep a moat around Keytruda after 2028 or at least extend the competitive protection around Keytruda, might not be developing as Merck management expected.
Merck’s Q3 ’24 EPS estimate was reduced from $2.22 in the March quarter to $1.81 as of today, while the Q4 ’24 EPS estimate was reduced from $2.11 to $1.88, after the 2nd quarter earnings release.
There are a lot of crosswinds around Merck. Some of the Q2 ’24 results were great: revenue grew 11% y-o-y, operating income was up a lot y-o-y (i.e. $6.4 bl versus a loss in Q2 ’23 thanks to an acquisition) with EPS also up a lot thanks to the Q2 ’23 acquisition write-off inflating the y-o-y compares. However, the revisions following the call were not so favorable.
Merck was a large-cap pharma stock that provided some diversification for clients away from the GLP-1 drugs that are currently driving growth in the sector and that also represents a 23% weighting in the PPH (PPH) (LLY and NVO, neither of which are held by clients).
This blog sold most of the client position for all but the most tax-sensitive of accounts that still have a gain in Merck.
The overall health care sector has seen negative revisions to the expected earnings growth for the sector in 2014, with sell-side estimates expecting as much as 15% sector growth as late as early April ’24, but now that’s been whittled down to 6% as of late August ’24.
Nike (NYSE:NKE)
Nike is down 22% YTD as of Friday, August 30th, after declining 6% in 2023. The stock peaked in late 2021 near $179 – $180 per share.
The big question around Nike is, “Does the brand remain intact ?” The issues around the stock seem to stem from the change in strategy that moved away from retailers and towards “direct-to-consumer” (DTC), which wasn’t executed very well. It appears changes are being made already internally, as the key executive who supposedly managed Nike’s wholesale relationships has returned to the company, and traditional retail channels are being emphasized again, as opposed to DTC.
We’ll see the results – or the start of the recovery – in September ’24 when Nike reports their fiscal Q3 ’24 on September 24 ’24.
Expected EPS growth for fiscal ’24 was +21% at one point in the last 2 years, but after the results reported in late June ’24, or the fiscal Q2 results, expected EPS growth for fiscal ’24 is now -21%.
That’s a big shift.
Like Merck, Nike has a lot of crosswinds impacting the results: after the channel issues, there is China, and its slowing economy not to mention the business cold war happening between the US and China, over tariffs, etc. then the inventory overhang during late ’21 and early ’22 impacted the numbers, however the last 5 quarters for Nike have seen revenue growth exceed inventory growth, which is a plus. The Olympics seemed to be a push for the footwear giant, but we’ll learn more in with earnings in three weeks.
The biggest negative I see for Nike is the continued market share gains by HOKA, which I now see everywhere on people’s feet. (Take anecdotal evidence with a grain of salt, but with retail, it can be telling. The HOKA phenomenon was referenced here last March ’24.)
After the horrendous June ’24 earnings release, this blog took losses in client’s taxable accounts, leaving the IRA account positions unchanged, and now the positions can be rebuilt some before the Sept ’24 earnings release and – depending on the results – following the earnings release.
Nike is still one of the world’s most recognizable brands, but that doesn’t always translate into annual stock performance. Look at Coca-Cola: Coca-Cola peaked in late July 1998, and since then has underperformed the S&P 500 by 338 basis points a year.
What worries me about Nike is Phil Knight’s age (86 years old) and a corporate culture that needs to be young, vibrant, energetic, and compete against the likes of Liv Dunne’s Vuori, Luluemon (LULU), and the plethora of shoe upstarts that seem to be proliferating daily.
Nike needs to get its game back (no pun intended). Revenue growth was +1% in fiscal ’23 and is on track for 0% growth in fiscal ’24: the last time that happened was the late 1990s, when the stock underperformed for a few years, as it’s doing now.
Like Walmart, Nike is trading around at 26x expected fiscal ’24 EPS of $3.12 (which was reduced sharply after the June ’24 release) with negative growth EPS growth in ’24 and an expected 15% growth next year, while the cash-flow and free-cash-flow valuation for Nike are 17x and 19x trailing-twelve-month (TTM) cash flow.
Nike’s free-cash-flow yield jumped from 4% pre the June ’24 earnings release to 5% today.
Summary/conclusion
In the next few weeks the goal will be to add more to Walmart on weakness, and smaller amounts of Nike, and probably avoid Merck for now. It’s tough to sell a stock like Merck from accounts since it filled a number of buckets, i.e. it was a health care stock, uncorrelated to the GLP-1 or Ozempic craze, it had a blockbuster drug that was still working, Merck had a GARP-y valuation with expected 7% revenue growth and 17% – 20% EPS growth at a 14 – 15x multiple, but the lack of pipeline diversity and some suspicion over Gardasil’s durability was too much downside. Merck’s next support is $90 per share, which is another 25% lower from here.
Walmart’s probably the best of the three in terms of catalysts for further P/E and cash-flow expansion over the next 12 – 15 months. The “flywheel” approach Walmart has adopted – similar to the MegaCap 7 – has a lot of potential to add to revenue growth, away from the core grocery business, plus the utilization of AI in their supply chain and merchandising should drive even further margin expansion. Here was Walmart’s earnings preview a few weeks back. Walmart’s in a sweet spot right now of new revenue opportunities, AI savings, and margin expansion. Even a nastier-than-expected recession would actually drive “traffic growth”. If you look at Walmart details from late 2008 and early 2009, Walmart US comps stayed positive as consumers sought out discount retail.
When Nike peaked in 1997, after it was hit with the “brown shoe” craze back then, it took 7 years for the stock to make an all-time high, but that includes the worst market for growth stocks in 30 years, which was 2000 to late 2002, early 2003. It will be three years since Nike hit its all-time high in early November ’21 of $179 per share, and there is little sign of recovery. While a healthy pullback was badly needed for Nike after its multi-year run, investors need to see some positive revenue news and better-than-expected revenue growth. If you’re going to watch one metric, watch revenue growth, both absolute growth and relative to expectations.
None of this is advice or a recommendation, but only an opinion. The individual stock strategies can change at any time. Past performance is no guarantee of future results and positions can change at any time. Investing can involve the loss of principal even over short periods of time. Readers should gauge their own comfort with portfolio volatility.
Thanks for reading.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
