Uncategorized
Walmart not married to current ratings
admin | October 19, 2018
This document is intended for institutional investors and is not subject to all of the independence and disclosure standards applicable to debt research reports prepared for retail investors. This material does not constitute research.
During an investor meeting Walmart’s CFO remarked that “we’re not married to our credit rating”, while discussing the potential for future acquisitions. The comment spooked Walmart’s bond investors, with medium to long-term debt widening 5 to 7 bp. The 30-year bonds could retest the June wides, particularly if speculation intensifies that Walmart may pursue a potentially transformative acquisition of Humana or Anthem.
Investment meeting recap
Walmart hosted an investment meeting earlier in the week that focused on its unique asset base coupled with its strong execution and innovation. Management used the time to reiterate fiscal year 2019 (FY19) total sales growth guidance of roughly 2% on a constant currency basis and updated full year earnings per share (EPS) guidance due to dilution from the Flipkart acquisition. Walmart management now expects FY19 adjusted EPS to be in the $4.65-$4.80 range, down from $4.90-$5.05, and provided FY20 guidance of total sales growth of 3% or greater, and SSS growth of 2.5%-3%. Management is forecasting that e-commerce growth will be roughly 35% for the year. While 35% is a solid number, it is down from the 40% expected in FY19.
Interestingly enough, management used the meeting to discuss its financial prowess as they are the first company with $0.5 trillion in annual revenue and a rock solid balance sheet underscored by AA ratings. However, when asked about asked about potential acquisitions and their willingness to “flex outside” of its current ratings, management noted that they were not “married” to the credit ratings and the ratings would not be a reason for them to not pursue an acquisition that was good for the business long term. The comments alone injected some volatility into a credit that that is rarely characterized as volatile. The 5-year part of the curve widened roughly 7 bp after the headlines, while 10-year to 30-year paper widened out about 5 bp.
Potential Candidates
Walmart’s comments highlight the real threat from not only competitors but growth in general. While retail conditions have improved and Walmart’s annual same store sales growth is at levels last seen in fiscal 2009, the days of 5% annual growth seem to be a thing of the past. Retail has largely become a story of the have’s and have not’s as evidenced by the latest bankruptcy filing of Sears. Given WMT’s size and strong cash position on the balance sheet ($15.8 billion as of 7/31/18) any acquisition that would potentially move the needle with respect to its ratings would need to be quite large. Earlier this year, WMT was speculated to be in talks to acquire or partner with Humana Inc. (HUM – Baa3/BBB+/BBB). An HMO is a likely target and we believe Anthem Inc. (ANTM – Baa2/A/BBB) may be the better target. In August, WMT and ANTM announced that they will be partnering to launch a program in January 2019 that would allow Anthem Medicare Advantage plan members to use over the counter (OTC) allowances for OTC medications and health-related items at both WMT stores and on walmart.com. The partnership could be the first step in a potential acquisition down the road.
Relative Value
With the recent widening in the credit, Walmart bonds now trade roughly 7 bp wide to Home Depot (HD – A2/A/A) in the 10-year part of the curve (WMT 2028s 70/68 versus HD 2027s 63/60). This is consistent with credit default swaps, where Home Depot 5-year CDS is currently trading 5 bp inside of WMT. However the reverse is true in the 30-year part of the curve, where WMT trades roughly 4-5 bp through HD (WMT 2048s 93/91 versus HD 2047s 98/95). Walmart debt could come under further pressure in the 30-year part of the curve, and retest the wides witnessed in June, which were roughly around the 100 bp area.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2025 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
