It looks like this is the year for Wal-Mart Stores, Inc. (WMT) to change market sentiment and break Walmart stock out of a multi-year funk.
Hell, it’s about time.
The world’s largest retailer is taking hits on all sides. The strong dollar is slashing revenue from overseas. Higher wages, store refurbishing and big investments in e-commerce are adding to costs.
These are just the more recent worries weighing on Walmart stock. Trouble extends all the way back to the great recession, when Walmart’s core customer was disproportionately hurt by the economic downturn and still hasn’t quite come back.
For what it’s worth, about a year ago a Fox News poll found that 64% of respondents thought the U.S. was still in recession. (Officially, it ended in June 2009.)
But that goes to show what Walmart — and the Walmart stock price — is up against. Stagnant wages and a recovery in the labor market driven by low-paid or part-time jobs hits Walmart right in the register.
Hell, even WMT had to acknowledge that it was underpaying its workers.
The sum total of this mess was a Walmart stock price that tumbled nearly 30% last year. But now, it appears the bottom has been found.
Almost incredibly, WMT stock is up roughly 20% since it hit a three-year low back in November. Even better, the way Walmart stock is rising suggests that it can probably hold on to these latest gains.
That’s because sentiment is coming back.
Walmart Stock and the Gift of Multiple Expansion
Not much has changed in the past few months.
Walmart is still looking at higher costs — and a hit to net earnings per share — in order to pay for employee raises. It’s still coming up short in the e-commerce battle with Amazon.com, Inc. (AMZN ) and Target Corporation (TGT). The dollar is still strong.
Yet, at some point the market came to the realization that all the bad news was baked into the share price. Sure, times are tough, but it’s not like Walmart is done for.
This isn’t to say that the worst is over or that Walmart stock has more tremendous upside. It’s just that the market overdid the selloff into the November low.
Now that the market is more confident in Walmart and its turnaround story, sentiment has changed. You can see that in Walmart’s trailing price-to-earnings multiple, which hit a low of about 12 near the end of 2015. Today, WMT goes for almost 15 times forward earnings.
Be that as it may, improved sentiment also suggests that it could be tough to add, say, another 20% from here. WMT’s valuation is already pretty pricey by its own standards. Investors’ belief in a better future has limits.
Eventually, fundamentals are going to have to do the heavy lifting in raising the Walmart stock price, not just multiple expansion. That’s what investors are waiting for.
For now, at least, they’re giving Walmart the benefit of the doubt.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
