Wal-Mart Stock Sell-Off: For Pete’s Sake, People, You’re Missing the Point
The obsession with revenue growth by investors, often to the exclusion of a little thing called profits, has led to some bizarre stock charts, like this one featuring our friends at Amazon (AMZN):
Wal-Mart (WMT) shares are off today, despite an 11% increase in EPS, because third-quarter sales for the chain came in a tad under the preferences of analysts.
Yes, growth is lovely. It can cover up a multitude of sins. But when a company matures, and enters a slow growth phase, that’s when we see whether the suckers can manage or not. And as we’ve said for some time at YCharts, Wal-Mart may run some ugly stores and engage in some unattractive behavior, but the day-to-day management of operations and finances is nothing short of amazing.
While the geniuses at Amazon manage to have narrowing margins amid rapid revenue growth – seemingly selling dollar bills for 99 cents apiece – Wal-Mart manages steady margins even as it grapples with slowed growth. In the most recent quarter, for instance, total revenue rose just 3.4%, but due to operating expense control operating income rose 4.0%, net income rose 9% and net income per basic share rose 11.3%. That’s operating and financial leverage, folks.
Disciplined spending and a tight capital expenditure budget produce generous cash flow, returned to shareholders through a rising payout – dividend yield currently at about 2.3% -- and big stock buybacks.
One area of concern – or is it a giant opportunity? International margins (that’s where the growth is, folks, with nine-month international sales up 7.6% vs. 4.5% at Wal-Mart stores in the U.S.) are weak. Operating margins at U.S. Wal-Mart stores were 7.6% in the nine months ended October 31, but just 4.4% overseas.
Yes, it’s harder to operate outside the home market. Some of the sharp-elbowed labor practices that Wal-Mart engages in stateside wouldn’t fly in Europe, say. And arriving later than locally-based competitors, Wal-Mart locations mightn’t be as prime overseas as they are in the U.S.
But. Wal-Mart clearly knows how to operate its stores and distribution network at a higher level of profitability than is currently seem in international operations. A little more domestic revenue growth would we swell, but the low-hanging fruit is overseas.
Jeff Bailey is the editor of YCharts, which includes the just-released YCharts Pro Platinum for professional investors.