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With two of the growth giants of the late 1990s, there has been a decided turn for Walmart (NYSE:WMT) for the better since announcing in April ’23 that the retail giant would be focusing on supply chain and expense rationalization, notably through AI, while Cisco (NASDAQ:CSCO) has had a rough year, but faces easier comps going forward, so not all hope is lost for the networking giant.
Walmart: Fiscal Q1 ’25 quarterly summary
Walmart reported a rock-solid fiscal Q1 ’25 last week, May 16th, 2024, and then saw two days of above-average volume in the stock.
- Walmart revenue rose 6%, operating income rose 13%, and EPS rose 22% YoY.
- All margins, i.e. gross, operating and net rose YoY.
- Fiscal Q2 guidance: Revenue +5%, operating income +8%, and EPS $0.62 to $0.65, which was better than expected.
- The 3.8% quarterly comp was all “traffic-driven” as “avg ticket” was flat YoY. Grocery was expected to “deflate” in Q1 ’25, but food inflation actually rose a little, while “general merchandise” actually deflated a little, per the conference call notes.
- Looking at EPS and revenue estimate revisions, post-release, WMT forward EPS rose slightly after the quarter, but the bigger revisions were in revenue.
Trading at 25x expected fiscal ’25 EPS of 7% YoY growth, WMT trades like the consumer staple it is. What’s intriguing is that it’s still at 0.75x TTM revenue, even thought Costco (COST) is now trading over 1x revenue.
My expectation is the operating margin expansion will eventually result in some of the “price-to-sales” discount of Walmart to be erased. Although the P/E is 25x, WMT’s price to cash flow is just 14x, which is unusually indicative of a depreciation-heavy business, like retailers usually are.
The key sentence in the Walmart conference call (which I found very encouraging), was the comment that “about 1/3rd of the operating income increase this quarter came from new businesses, i.e. advertising, membership, data ventures, etc.”
That was surprising to hear. In this blog’s Walmart earnings preview, a Jefferies report was cited noting that Walmart’s expected advertising revenue this year would only be $3-4 billion, so either advertising is growing faster or the other ventures are growing quickly, either of which is a big win for Walmart, since you’d have to think that this “new” revenue is “margin-rich” (i.e. doesn’t have the cost of goods sold attached to it, like retail.)
Finally, Walmart seems to have solved the e-commerce issue that has plagued them for the last 15 years. Especially international, which was rather surprising to read at +19%, while Walmart US grew 22% YoY.
The ecommerce growth rates are critical for Walmart to become more like Amazon (AMZN), even as they retain the strengths of the core grocery and general merchandise store business.
With the AI benefits sure to come and the new businesses, as well as e-commerce really starting to roll, I don’t think it’s too aggressive to expect a $100 stock price for Walmart with a 2-3 year time frame.
This blog’s internal valuation model puts a shorter-term value on the stock of $77, while Morningstar’s fair value estimate is $52, which usually lags a bit. Walmart is expected to be a big AI beneficiary. There are other productivity-improving initiatives at work too, but those will be contained in another post.
Cisco: Fiscal Q3 ’24 quarterly summary
The stock was trading sharply higher after its fiscal Q3 ’24 quarterly report last Wednesday, May 15th, 2024, but by the open the next morning, the stock was down and is still drifting lower as of May 22, ’24.
In fiscal ’24 Cisco is expected to report its first year of negative YoY EPS growth since 2009.
Here’s the quick highlights of fiscal Q3:
- Revenue fell 13%, operating income fell 12% and EPS fell 12% YoY.
- The July ’24 quarter revenue guide was for $13.4 to $13.6 billion.
- The Splunk deal is now completed and will add about $1 billion in revenue to CSCO in fiscal Q4 ’24 (per Jefferies).
- Morningstar noted that they continue to see weaker networking demand, and the stock certainly does trade like that.
- Networking is roughly half of CSCO’s total revenue. Here’s the quarterly progression in networking revenue since the peak in July ’23:
- Q3 ’24: $6.52 billion
- Q2 ’24: $7.08 billion
- Q1 ’24: $8.8 billion
- Q4 ’23: $9.46 billion
That’s a pretty sharp decline.
Post the quarterly earnings, forward EPS estimates continue to decline, while forward revenue estimates actually were revised higher as Splunk will impact Cisco revenue.
This blog owned the stock for years as “value tech” but sold it around $43 in early 2022 when the networking issues started. It’s not ideal to hold laggard or out-of-favor stocks in momentum markets like 2020 to 2022, where the stock is expected to underperform, but when value stocks start underperforming in tough markets like 2022, you have to jettison the name. You want value or non-momentum stocks to hold up and outperform, when you get into sloppier bear markets like we saw in 2022.
Trading at 13x EPS over the next few years, 3.5x sales, and 13x cash flow, with a 3% dividend yield, the stock isn’t expensive, but talk about the perennial underperformer.
The Cisco earnings preview talked about the stock’s performance for the last 22 years. Cisco has been acquiring these smaller business for nearly 25 years, and diluting shareholders, and it’s generated almost no growth. The networking business is half the business.
Cisco is likely why Mr. Buffett doesn’t own tech. That’s it for the reports this blog was interested in last week.
None of this is advice or a recommendation. Past performance is no guarantee of future results. Investing can involve the loss of principal even for short periods of time.
Thanks for reading.
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Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
