I try not to be too much of a fanboy when it comes to corporate executives, and especially CEOs, for a couple of reasons. Firstly, I am not so arrogant as to believe that they read what I write, nor do they even care in any way what I have to say. Secondly, the massive and growing pay gap between workers and CEOs in America suggests that they are rewarded enough without my two cents.
Even so, sometimes a company’s performance is so spectacular under a particular leader that recognizing how good they are should inform investment decisions. Walmart (WMT)’s earnings this morning show once again that their CEO, Doug McMillon is one such case.
Before we get into the details of the earnings report, let’s step back and take a big picture view of what McMillon has achieved since becoming Walmart’s leader on February 1, 2014. On the surface, the stock’s performance since then is nothing to write home about.
As you can see from the chart below, WMT has gained 38% since McMillon took over. That is lower than the 50% gain in the S&P 500 during that time, but a more relevant comparison is to the retail sector ETF XRT, which is up only 17%, and that sector outperformance has been achieved against significant headwinds.
Four or five years ago, the conventional wisdom was that the so-called Amazon (AMZN) effect was going to continue to hurt traditional retailers and a price-driven company such as Walmart would be particularly hard hit. Over the last few years, however, that has not been the case, and that outperformance of expectations has been accompanied by a gradual change in the perception of the company.
It was once the favorite target of those that love to criticize corporations, whatever their political bent. Those on the left saw it as a ruthless exploiter of labor, while those on the right maintained that it was destroying entrepreneurship by squeezing out small businesses.
When McMillon took over, he instituted policies designed to address both of those criticisms. They raised wages across the board before doing so became either fashionable or necessary and began to source more products in the U.S.A. before tariffs made that such a no-brainer.
A good case can still be made that Walmart squeezes suppliers hard, but some would argue that that is what is supposed to happen, and that it makes everyone concerned leaner and more efficient. There certainly doesn’t seem to be any shortage of suppliers lining up to be squeezed.
The wisdom of doing those things can be seen in the results over the last few years. This morning’s numbers were good, but the real success is in what they represent from an historical perspective. The most important metric in that regard is comparable sales, which increased by 3.4%, making it fifteen straight quarters of improvement. In that context, any disappointment that may come from a small miss on revenues is bound to be only temporary, and the long-term outlook must be positive.
Consistent organic growth like that is usually priced into a stock and Walmart’s trailing P/E of over 58 would suggest that that is so here, but once again, dig a little deeper and there is value to be found. WMT is priced at less than 0.6% of annual sales, which is low for any company but especially so for one that generates over $17 billion of levered free cash flow.
Context seems like an old-fashioned concept these days, not least because it is hard to fit into 140 characters, but when applied here it is clear that Walmart has responded to major challenges successfully and positioned itself for continued growth. Given that, it is not hyperbolic to say that McMillon may be the best CEO of a large corporation in America, and on that basis alone, the stock is worth owning.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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