Walmart: Unlikely to Outperform Market Long Term

Walmart (WMT) is the world’s largest retailer with $570 billion in revenue. Through its 11,400 stores, it offers a wide range of products such as groceries and electronics, just to name a few.

Although the company has a large competitive advantage, we are neutral on the stock because its massive size will make it difficult to generate any meaningful growth. (See Analysts’ Top Stocks on TipRanks)

Competitive Advantage

There are a couple of ways to quantify a company’s competitive advantage using only its income statement. The first method involves calculating the earnings power value (EPV).

Earnings power value is measured as adjusted EBIT after tax, divided by the weighted average cost of capital, and reproduction value can be measured using total asset value. If earnings power value is higher than reproduction value, then a company is considered to have a competitive advantage.

The calculation is as follows:

EPV = EPV adjusted earnings / WACC

$544.43 billion = $35.388 billion / 0.065

Since Walmart has a total asset value of $244.85 billion, we can say that it does have a competitive advantage.

In other words, assuming no growth for Walmart, it would require $244.85 billion of assets to generate $544.43 billion in value over time.

The second method is by looking at a company’s gross margins because it represents the premium that consumers are willing to pay over the cost of a product or service. A stable or expanding gross margin indicates that a sustainable competitive advantage is present. If an existing company has no edge, then new entrants would gradually take away market share, leading to decreasing gross margins as pricing wars ensue to remain competitive.

Taking a look at Walmart, we can see that gross margins have remained relatively stable in the past few years, hovering in a less than 1% range:

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Margins saw a drop, but it was tiny. It then recovered most of the drop. As a result, WMT’s stable gross margins indicate that a competitive advantage is likely present in this regard.


Most investors appear to be obsessed with earnings. This is especially true for institutional investors who tend to overreact to the slightest earnings miss. However, these paper profits have the potential to be very misleading, which is why we prefer to focus on free cash flow.

In the last 12 months, Walmart has recorded about $17.07 billion in free cash flow, making it very profitable by our definition, no surprises here. However, its free cash flow has been volatile in recent years:

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To us, this means that the company’s free cash flows are not very predictable. As a result, it wouldn’t be very helpful to try and value Walmart with a discounted cash flow forecast.


To measure Walmart’s risk, we will first check to see if financial leverage is an issue. We do this by comparing its debt-to-free cash flow. Currently, this number stands at 2.2x. In addition, when looking at historical trends, we can see that the debt-to-free cash flow ratio has been volatile:

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Overall, we don’t believe that debt is currently a material risk for the company because its interest coverage ratio is 8.2x.

However, there are other risks associated with Walmart. According to Tipranks’ Risk Analysis, the company has disclosed 21 risks in its most recent earnings report. The highest amount of risk came from the Macro & Political category.

The total number of risks has increased over time, as shown in the picture below:

Wall Street’s Take

Turning to Wall Street, Walmart has a Moderate Buy consensus rating, based on 15 Buys and three Holds assigned in the past three months. The average Walmart price target of $172.11 implies 27.1% upside potential.

Final Thoughts

There’s no doubt that Walmart is the dominant player in the retail space. Thanks to its large size, it can undercut its competitors on most items, providing it with a large advantage. However, for an investor looking for growth, Walmart is definitely not the answer.

It’s because of its size that it is unlikely to generate any meaningful growth in the years to come. In fact, the five-year compound annual growth rate for revenue has only been 3%. Therefore, we believe Walmart is unlikely to outperform the S&P 500 ETF (SPY) in the long term.

Disclosure: At the time of publication, StockBros did not have a position in any of the securities mentioned in this article.

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