Walmart (NYSE:WMT) reported earnings last night and so far WMT stock is holding a rally on the headline.
WMT beat earnings even though they were lower than last year’s this time. Revenues were higher than last year’s but the company missed its forecast. Management cited currency headways that may have interfered with this report card. WMT had some good news on comparable sales, especially in the U.S. which beat estimates.
In summary, Walmart delivered more good news than bad so the bulls have the upper hand … for now. So that brings us to the big question: is Walmart stock a buy here?
The answer, for the most part, is yes. I would suggest holding onto your longs, but don’t chase it unless the investment time frame is long term. This is not a knock against the company’s prospects as I am a fan of it. But it’s a concern with the price action at these levels.
So let me justify my answer: The stock market is still suffering from a massive trade war between the U.S. and China so they do have a host headwinds. This is a big unknown. WMT will probably pass the costs along to the consumers, but since margins are already thin there they will probably need to negotiate better sourcing terms if possible.
So it is not the time to get aggressive chasing Walmart stock up 3%.
Walmart’s management team is a proven winner. They are making many correct moves to adapt to the changing retail environment. They are pursuing e-commerce aggressively; for example, they just announced next-day shipping and beat Amazon (NASDAQ:AMZN) to the punch. Their advertising segment is also growing. These are hot topics for AMZN and Facebook (NASDAQ:FB) to name two.
Some of these changes until they mature will be a drag on profitability. This includes e-commerce as it becomes a larger portion of the total business. It’s not cheap to enter and grow a business that is so competitive already.
I am not bearish on the stock. In fact, if you own it, I would suggest keeping it. It’s a good defensive position in a jittery stock market. But its valuation is close to full as it sells at a price-to-earnings ratio of 42X. This is 25% more expensive than Costco (NASDAQ:COST). I don’t see the panic to build a new big position now.
Short-term traders could try and scalp momentum moves. Above $104, it could catch a second leg higher as it would invite momentum buyers. But for that purpose there are better vehicles.
This morning, management delivered a report that confirms that they are executing well on their plan. But there are still risks that loom. This week Macy’s (NYSE:M) sold off hard on its earnings results. I believe that most brick-and-mortar retailers are still struggling to survive the AMZN effect. Some of them will not make it, but Walmart will is not one to struggle. WMT will thrive in spite of Amazon.
Bottom Line on WMT Stock
Walmart has become more aggressive in its fight against AMZN. Just this week it announced free overnight delivery for orders? AMZN had announced a similar benefit, but WMT beat them to the market. Clearly, they know that it’s a fight that they need to win.
Not many retailers can do this to AMZN. WMT built its empire by growing with very thin margins. It has been the low price leader for decades. So when Amazon came to the scene, WMT was best ready for the fight. The only other major retailer with a similar advantage is Costco. So it’s no coincidence that these three stocks are thriving.
So the bottom line is that the fundamental opportunity for Walmart has never been better. They have the new technology to streamline their business even further and the money to make it happen. So, long term it’s a stock to own as it will be higher … I just don’t see the reason to chase it until it breaks out from $104.
These are turbulent times for as long as the U.S. and China are in a full-blown economic war and they are fighting it in the social sphere. Stocks will whipsaw by tweets and state media blurbs. This is likely to linger for at least late June when the two presidents can meet during the G20 meetings.
But the resolution is most likely not possible for months to come. So I should be cautious when taking on new bullish positions. I should start with partials so I’d have room to add in case gthe price goes against the thesis.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.