For Wal-Mart Stores, Inc. (WMT), investments in staffing and other benefits are bearing fruit, which is why analysts at Jefferies upgraded WMT stock today.
And this is just the latest bit of news pointing to better things ahead for Walmart, at least for investors who can remain patient.
Walmart is in the midst of a multi-year program to improve the shopping experience and build out its online store. So far, the early going has been encouraging.
After conducting channel checks, Jefferies concluded that Walmart is on the right track. Sales are benefiting from better-paid employees, spruced up stores, improved inventory management and grocery sourcing. As a result, the investment bank hiked its WMT target price to $82 from $60 and recommendation to “buy” from “hold.” From the note to clients:
“Our Google consumer surveys showed those customers that were aware that Walmart is about to make incremental price investments were also those that expressed a willingness to shop Walmart more in the next year, suggesting that these actions should improve traffic.”
The bottom line is that Walmart should deliver better-than-expected sales, which in turn would lead to a cycle of upward per-share earnings revisions on the part of Wall Street analysts. And between higher EPS and improved sentiment, WMT stock should continue to deliver market-crushing returns this year.
Indeed, WMT already has the market buying into its turnaround efforts. Shares are up 16% for the year-to-date against just a 3% gain for the S&P 500. EPS revisions have helped, but the primary reason for this upside is market confidence. Walmart stock currently changes hands for almost 16 times trailing earnings. At the end of last year that number was closer to 12.
WMT Stock Gets the Benefit of the Doubt
To be sure, Walmart has plenty of serious challenges. Most broadly, many of the gains stemming from seven years of economic expansion have bypassed Walmart’s core customers. They can’t seem to catch a break when it comes to job creation and wage growth.
More specifically, Walmart is still looking at higher costs — and a hit to net earnings per share — to pay for employee raises. It’s still coming up short in the e-commerce battle with Amazon.com, Inc. (AMZN) and even Target Corporation (TGT). The U.S. dollar is still strong, and that’s weighing on revenue from international operations.
And then there’s the case that big-box retailers aren’t in fashion quite like they used to be — and online shopping continues to surge. Walmart is drilling down on its e-commerce business, but it’s unclear if that will ever amount to more than a fighting retreat against Amazon.
Be that as it may, Jefferies’ channel checks suggest that Walmart has a credible strategy and it’s executing said strategy effectively. If WMT can exceed the Street’s expectations over the next couple of earnings periods, sentiment and shares will rise accordingly as even more investors will give it the benefit of the doubt.
Jeffries price target implies upside of 15% in the next 12 months or so. That’s a buy in any investor’s portfolio.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
