Wal-Mart ROIC Far From Generating Outperformance

Wal-Mart Stores Inc (NYSE: WMT) would need to improve its return on invested capital significantly to become “a multiyear outperformer,” Argus’s Chris Graja said in a report. He maintains a Hold rating on the company.

In 3Q17, Wal-Mart’s trailing 12-month return on investment declined by 900 basis points to 15 percent. The company’s adjusted operating income was down 4.6 percent, and average invested capital actually fell 0.9 percent, Graja mentioned. He added, “We will be looking for continued capital discipline.”

Comparing The Performance

Over the past five years, the S&P 500 generated an annualized return of 14.6 percent. With an annualized return of 5.7 percent, Wal-Mart had underperformed. Comparatively, Home Depot Inc (NYSE: HD) had recorded an annualized return of almost 29 percent, nearly double the return of the index, Graja noted.

What Wal-Mart Would Need To Do

Wal-Mart’s stock would outperform if the company can “consistently boost ROIC,” the analyst stated. He added that to achieve this, Wal-Mart would need to “grow income faster than sales and sales faster than its capital base.” It was not enough to “simply boost earnings by opening more mildly profitable stores or to boost comp sales by stuffing stores with more inventory.”

Graja raised the EPS estimate for FY 2017 from $4.40 to $4.45 to reflect the Q3 beat.

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