Wal-Mart Stores, Inc. (WMT): Intangible Perspective by Eric Bush, CFA, Gavekal Capital Blog
Wal-Mart has had a rough go of it lately as its stock price has fallen by over 30% over the past year. Part of the reason for WMT’s underperformance has been due to concerns over higher employee training costs and other intangible investments the company is undertaking. From a long-term perspective, regularly readers know that we view these intangibles investments positively even if they have adverse short-term effects on the bottom line. We thought it would be a worthy exercise to dig a little deeper into the data on Wal-Mart. The punchline of this piece is that from a fundamental and valuation perspective, Wal-Mart looks tempting. However, its technical outlook currently makes this stock much less appealing in the short-run.
Investors are always surprised to found out a retailer like WMT is, in fact, a Knowledge Leader. And no WMT doesn’t invest in research and development, however, they do invest consistently and persistently in other intangible assets such as brand equity, employee training and codified information. And as we stated above, analysts are currently acting a bit short sighted in our opinion in the way they are responding to the news of further intangible investments. This most likely will lead to a catch-up period in the future when we would expect to WMT outperform. However, as we will see at the end of this piece this catch-up period may be a ways out. Overall, WMT spends over twice as much on intangible investments as they do on traditional capex. They spend about twice as much on intangible investment as Costco does.
WMT has a very sound balance sheet. They currently only have about 19% net debt and a large percentage of their balance is filled with long-term, income producing assets. Over 66% of their total assets are long-term assets (author’s note: all fundamental and valuation data is intangibly-adjusted unless otherwise stated). Also, over a fifth of its entire asset base is made up of intangible assets. WMT’s consistent investment in intangible assets as created a huge reservoir of productive capital that remains hidden to most investors. After we intangibly-adjust WMT’s financial statements, we find that WMT has about $56 billion more in assets than what their reported financial statements indicate. This means that their asset base, which drives future profits, is about 25% larger than what is reported.
Intangible-Adjusted Balance Sheet Ratios
“As-Reported” Balance Sheet Levels
Intangible-Adjusted Balance Sheet Levels
Even with an asset base of over $259 billion, WMT remains impressively productive with the capital they deploy. They currently are producing a 10.1% ROIC and 12.5% ROE.
Intangible-Adjusted Profitability Ratios
One fact that is undeniable is the slowdown in the overall growth rate of WMT that has taken place over the last several years. Over the past 20 years, WMT has increased sales per share, EPS, book value per share, and cash flow per share have all increased by at least 10% annually. However, over the past five years the growth rates for these metrics have been pretty much cut in half. The good news for WMT is that dividend continues to grow at a double-digit percentage pace.
Intangible-Adjusted 20-Year Growth Rates
Intangible-Adjusted 5-Year Growth Rates
Another piece of good news is that a valid valuation case can be made for WMT. WMT is trading at just 6.5x cash flow and just 0.4x sales. It’s trading at a 40% discount to the overall MSCI World Index and is trading at a 30% discount to its own historical valuations over the past 10-years. It also pays out a nice dividend yield at 3.4%, which is 40 bps more than what 30-year US treasuries are currently dishing out.
Intangible-Adjusted Valuation Ratios
Intangible-Adjusted Comparative Valuation Ratios
Finally, where the rubber meets the road is when we look at our relative performance point and figure charts. After trading in fairly tight trading range over the past four years, WMT has fallen completely out of favor with investors and subsequently it has fallen through its historic support line. WMT is usually a low volatile stock so the fact that it slammed through historic support is an important signal for the more immediate outlook of the stock. It will take sometime for WMT to reverse its current downtrend to begin a new uptrend in earnest.