Friday, June 3, 2011

Walmart Share buyback announcement

Honey I shrank the share count!

Walmart (WMT) announces a $15B share buyback.  Based on my quickie calculations at today's price this is approximately 8% of the outstanding shares.  

WMT's headline problem is that it's customers in the U.S. are facing financial stress. WMT recently indicated that many of it's customers run out of money before the end of the month.  A grim situation indeed.  U.S. unemployment numbers were published today as well which is more of the same type of story. 
On the positive front, WMT has experienced strong international sales and plans on continuing to expand overseas in the next few years.  WMT is also looking to expand it's small store format in the U.S. as the "dollar" stores have taken a bite out of it's business in the U.S. over the last couple of years.

Over the last two years the shares have produced bond like returns.

The share buyback

Based on my math, after this buyback is complete, the company will have shrunk the company share count approximately 20% over a 5 year period.  A significant pace.  Currently the stock is trading at about 10x to 11x one year forward consensus earnings estimates.  The current consensus view is that WMT will grow EPS approximately 10% over the next five years.  The forward valuation multiple is currently less that the S&P 500.  The point can be debated, but I believe a case can be made that the valuation here relatively inexpensive at this level.  Looking ahead, if this turns out to be the case, personally I am comfortable with share buy backs at or below fair value for the company.  If WMT can increase operating earnings over the next 1 - 3, 4, 5 years above current consensus, the buyback valuation question will look even more favorable.

S&P's current valuation estimate for WMT, before today's announcement was $61 per share with a one year forward valuation estimate of $65.  Wall Street's current one year forward valuation estimate per share, before today's announcement was approximately $61.  The stock is currently trading between $50 to $55, so the buyback valuation question looks reasonable.  From a balance sheet perspective, the buy back will not likely cause stress as WMT will maintain it's current bond ratings.

Brief Overview

Today's negative unemployment news is already painfully well known by WMT customers and is not good for WMT's customers who are already facing much economic stress. At the same time, unemployment data is a lagging economic indicator.  I have no doubt that the economic bull and bear debate will continue.  Headline consumer related economic data that is followed by the public, politicians and media has rolled over lately due to food and energy prices as well as the Japan earthquake, among other factors.  The folks on the right also want to push austerity measures that appear to be poorly timed based on current U.S. economic conditions.  The combination of a calm bond market and sluggish employment data suggests that now may not be the time for this economic remedy as overall economic growth has slowed.

Despite the headlines, there are other economic indicators that tell a more positive story.  A recent example is illustrated by a June 1, 2011 analysis by Moody's that tracks liquidity stress in lower rated corporate bond issuers.  While the stress index ticked up very slightly in May 2011 vs. April 2011, on an absolute basis, the measured stress level is far below where it was during the peak of the crises (September 2008 to March 2009).  On a measured basis, the index now sits 20 vs. a recent crises peak of approximately 100.  You are not likely to see see these numbers in the news headlines or discussed by the media as they do not produce fear and negative hype.  In short as of now, there is not much financial stress in U.S. corporations today as this index sits at pre crises levels.  Since it did tick up very slightly M-T-M it is worth monitoring.  While I say this, I am not yet losing sleep over the number.

In my view, the big overall challenge for WMT is the law of large numbers as it is extremely difficult to grow a company this size.  The positive for WMT is it's corporate finance actions (dividend increase and stock buyback).  The stock currently trades at a 3% dividend yield.  Economic difficulties for WMT's U.S. consumers are likely to continue for the time being.  These things are well known and likely priced into the stock.  If and when the day comes that fundamentals in the U.S. show some sign of improvement at the margin, expectations may change here and the stock may move up some.  On the other hand, ongoing negative US comps or worsening results can pose a risk to the current stock price and assumption set.

With WMT, there is a ton of news, opinions and awareness, so many folks have viewpoints here.  In short, mine is to hold on for a while as current news is negative and expectations appear to be reasonably low. The stock is a stalwart.  In my opinion there is some room for stalwarts in portfolios.   What attracts me about this situation is the cheap looking forward valuation combined with the fact that the share count will likely continue to decrease which creates an ongoing anti-dilutive positive impact for existing shareholders, in my view.  It may also be worth noting that both Mr. Warren Buffet and Bill Gates hold big positions in this stock, based on recent SEC filings.

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