Walmart's EBIT Dilemma, And Why It Could Weigh On Shares Moving Forward

Investors are cautioned against buying Walmart Inc WMT's stock after suffering its worst trading day since the late 1990s, according to BMO.

The Analyst

BMO Capital Markets' Wayne Hood maintains a Market Perform rating on Walmart's stock.

The Thesis

Walmart's EBIT has been declining from 2014 to 2017 and many investors had high expectations for the retail giant to reverse the trend, Hood said in a note. During this time period the company's EBIT fell nearly $5 billion, or 18 percent, although this could mostly be attributed to investments in the business to better position the company over the longer-term.

Walmart's management team expects its operating margin to fall in a range of 4.3 to 4.4 percent in 2018, which marks a decrease from 4.53 percent a year ago, the analyst said, but the company's earnings may signal that management "aspires to get to a point where the EBIT margin is flat." The problem for Walmart is that it will faces challenges in achieving a flat EBIT margin given the many investments ahead in its business (price, stores, online experience) despite better managing expenses.

As such, investors are cautioned against buying the stock as it hasn't reached an attractive enough price point to generate a favorable risk to reward profile, according to Hood. If the stock were to fall down to $80 or if Walmart shows it can achieve a flat EBIT margin rate, then investors may want to consider buying the stock.

Price Action

Shares of Walmart were trading around $92.49 Friday.

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Image credit: Walmart Corporate from Bentonville, USA [CC BY 2.0], via Wikimedia Commons