Symbotic Partnership Will Automate Distribution Centers

Key Takeaways

• Investments in technology and automation aimed at increasing efficiency could improve net margins through cost savings.
  
• Expansion in e-commerce and omnichannel capabilities supports revenue growth by capturing greater digital market share.
  
• Challenges in consumer demand, labor costs, regulatory risks, supply chain issues, and tech delays could pressure Walmart de México's margins and growth prospects.

Catalysts

Owns and operates self-service stores in Mexico and Central America.

• Wal-Mart de México's investments in technological improvements and automation, including partnerships with companies like Symbotic for building fully automated distribution centers, are expected to increase operational efficiency. This could lead to cost savings and positively impact net margins.
  
• The company's expansion into e-commerce and omnichannel capabilities, with initiatives such as Walmart Connect and enhanced service levels for on-demand delivery, is likely to drive revenue growth by capturing more market share in the digital space.
  
• The introduction of new customer engagement platforms like the digital connection program, Walmart Beneficios, is aimed at increasing customer loyalty and frequency of purchases, potentially boosting overall revenue.
  
• Wal-Mart de México's focus on enhancing their ecosystem through the growth of verticals such as Bait and Walmart Fulfillment Services increases cross-selling opportunities and can strengthen earnings by expanding high-margin businesses.
  
• Strategic store openings and expansions, including new units in Mexico, Costa Rica, and Guatemala, are expected to contribute to revenue growth by increasing the company's footprint and sales capacity across the region.

Wal-Mart de México. de Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wal-Mart de México. de's revenue will grow by 8.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.7% today to 6.1% in 3 years time.
• Analysts expect earnings to reach MX$72.6 billion (and earnings per share of MX$4.15) by about December 2027, up from MX$53.6 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 25.5x on those 2027 earnings, up from 18.6x today. This future PE is greater than the current PE for the MX Consumer Retailing industry at 24.6x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.23%, as per the Simply Wall St company report.

Wal-Mart de México. de Future Earnings Per Share Growth

Risks

• The softer consumer environment noted by the CEO, with a slight reduction in customer traffic, suggests potential challenges in driving sales volume, which could impact revenue growth.
  
• Increased labor costs, as indicated by the CEO, are causing SG&A expenses to rise, which can pressure net margins if not offset by revenue growth or other cost efficiencies.
  
• The COFECE investigation introduces regulatory risk and potential legal costs, which may influence financial outcomes, including potential fines or constraints that could affect earnings.
  
• Supply chain challenges with inventory increases ahead of sales growth may affect inventory management costs and working capital, potentially impacting net margins and operational efficiency.
  
• Delays and challenges in launching new payment and tech initiatives could hinder the expected improvements in efficiency and customer engagement, impacting future revenue and earnings growth.

Valuation

• The analysts have a consensus price target of MX$72.93 for Wal-Mart de México. de based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of MX$83.0, and the most bearish reporting a price target of just MX$58.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be MX$1186.4 billion, earnings will come to MX$72.6 billion, and it would be trading on a PE ratio of 25.5x, assuming you use a discount rate of 13.2%.
• Given the current share price of MX$57.1, the analyst's price target of MX$72.93 is 21.7% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.