Last week's negative news and estimate cuts led to a major markdown in Walmart's(WMT) - Get Report share price. Many people now wonder if the stock represents an attractive value, after dropping from this year's peak of $91 to under $59.
Long-term holders like Berkshire Hathaway(BRK.A) - Get Report , (BRK.B) - Get Report , which didn't sell when WMT looked somewhat expensive, must be feeling really depressed. As of Oct. 16, 2015, the shares were $4.91 cheaper (-7.7%) than where they sat seven years earlier, at its 2008 pinnacle.
WMT now yields 3.33%. It trades for 13.1x fiscal 2015's new projection of $4.51, but a higher 14.0x P/E based on fiscal 2016's downwardly guided estimate of just $4.21.
If management is to be believed, WMT will have shown declining EPS for three straight years when FY 2016 wraps up on Jan. 31, 2017.
Walmart is not cheap. Its typical P/E from 2008 through 2014 was 14.2x, when profits were generally rising. Shareholders collected around 3.47% annually in dividends over those seven years.
Most of the company's largesse was courtesy of a payout ratio (all dividends /net profit) that expanded from 28% to 44%. If WMT continues to boost the dividend next year, those quarterly payouts will consume close to half the firm's after-tax profits.
The $20 billion share buyback authorization may put a floor under the stock, but would seriously dent the company's ability to invest in its future. It would not be possible if not for ultra-low borrowing costs due to the Fed's ZIRP.
This year's profit margins will be the worst in more than a decade. Higher wages and costs associated with the Affordable Care Act (a.k.a. Obamacare) are taking a big toll.
Somewhat ironically, the only remedy for WMT's anemic margins would be implementing significant price hikes. An increase of 1% across the board in retail pricing would bring net profit levels back quickly, while being unlikely to chase away the retailer's core customers. On average, Walmart's wares would still be priced lower than all but the membership warehouse clubs.
The prime impediment to boosting prices is the bad media coverage that would be sure to follow. In the end, though, few businesses can absorb permanently higher personnel expenses without passing them on.
Walmart has rarely gone lower than about 12 times current year's estimates even during times of great market turbulence. That implies further near-term downside, to around the $54 mark. WMT is a prime candidate for tax loss selling and portfolio purging by fund managers that won't want to show WMT on their year-end statement of holdings.
Patient investors may get a better chance to own WMT between now and Dec. 31. There is no rush to get involved.
At the time of publication, Paul Price had no positions in the stocks mentioned.