Why Walmart stock is about to get cheaper

Walmart (NYSE: WMT), the world’s largest retailer, has been making quite a bit of news lately. On Tuesday, it posted fourth-quarter earnings results that soundly beat analysts’ estimates. It also raised its dividend for the 51st consecutive year, bumping it up 9% this quarter.

Also on Tuesday, Walmart announced that it was buying Vizio (NYSE: VZIO), the smart TV and electronics company, to bolster its media business, Walmart Connect. Additionally, it will conduct a three-for-one stock split on Feb. 23, meaning each currently owned share will automatically become three shares, and the per-share price will drop to one-third of the current price.

Investors were pleased with these actions and the Walmart’s earnings results, as its stock price rose about 4% in Tuesday-morning trading to $177 per share. Let’s check out what these changes might amount to for investors.

Walmart beats estimates and buys Vizio

Walmart capped off a good year with a solid fourth quarter that ended Jan. 31 as its revenue jumped 5.7% year over year in the quarter to $173 billion. For the full fiscal year, the retailer’s sales rose 6% to $648 billion. Walmart’s operating income climbed 30% in the quarter to $7.3 billion and 32% for the full year to $27 billion.

Further, its adjusted earnings per share (EPS), excluding special items, hit $1.80 for the quarter, up 5.3% year over year and well ahead of the consensus estimate of $1.64 per share. For the full fiscal year, Walmart’s adjusted EPS was $6.65, up 5.7% from the previous year.

The big-box retailer’s U.S. net sales rose 3.4% in the quarter to $117 billion, including a 17% boost in e-commerce sales. Walmart International saw a 17.6% increase in net sales to $32.4 billion in the quarter, while its global e-commerce sales rose 23% year over year.

In addition to the growth in e-commerce, Walmart saw the revenue from its global advertising business increase 33%, including a 22% increase in Walmart Connect.

Walmart Connect is the company’s multi-channel advertising arm, which looks to connect advertisers with customers. The acquisition of Vizio announced on Tuesday is designed to bolster that business by giving Walmart ownership of the Vizio SmartCast Operating System, which is essentially a built-in streaming platform on Vizio smart TVs.

Thus, Walmart will not only own a major TV brand, but more importantly, the SmartCast system will provide a sturdy platform on which to promote and advertise its products. It is seen as a way for Walmart to boost its revenue in this high-margin business.

“We believe the combination of these two businesses would be impactful as we redefine the intersection of retail and entertainment,” said Seth Dallaire, executive vice president and chief revenue officer at Walmart U.S. in a statement.

The deal is valued at about $2.3 billion. 

Stock split: It will be cheaper, but it is a value?

The other big news for Walmart, set to occur just a few days from now, is the three-for-one stock split. This means that shareholders as of the close of the market on Feb. 22 will receive two additional shares for each share they hold. Thus, if you own one share worth $180, you will then own three shares after the split, with each worth $60 per share. As mentioned above, the new share price will be a third of what the share price is at the close of the market on Thursday.

Walmart has had nine stock splits throughout its history, with the last one done in 1999. With the stock now trading at an all-time high of about $177 per share, the company felt the time was right to do another stock split to keep the price accessible to its workers — and investors.

“Sam Walton believed it was important to keep our share price in a range where purchasing whole shares, rather than fractions, was accessible to all of our associates,” said Walmart President and CEO Doug McMillon in a statement. “Given our growth and our plans for the future, we felt it was a good time to split the stock and encourage our associates to participate in the years to come.”

Thus, as of next week, Walmart stock will be a lot more accessible to investors, trading in a probable range of between $50 and $60 per share. However, some investors might be wondering if Walmart is a better value at that cheaper entry point.

The big-box retailer still looks like a pretty good deal with a price-to-earnings ratio (P/E) of about 28, down from 44 a year ago at this time. The forward P/E of 24 also looks reasonable, given the firm’s outlook for the current fiscal year. Walmart is calling for a 3% to 4% increase in net sales and a 4% to 6% rise in operating income this fiscal year. Further, its adjusted EPS is estimated to be between $6.70 and $7.12 before the stock split, up from $6.65 in the last fiscal year.   

Walmart has also typically outperformed in slower-growing markets and economies, so it looks like a solid option right now.