How Much Higher Can Wal-Mart Stores Inc (WMT) Stock Go?

WMT stock now has more risk than reward

By Luke Lango, InvestorPlace Contributor

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Amazon.com, Inc. (NASDAQ:AMZN) who? Wal-Mart Stores Inc (NYSE:WMT) is soaring to all-time highs after WMT stock provided bullish updates at its annual investor meeting on October 10.

The global retailer, which was once lumped in as just another Amazon victim, is winning in its fight back against the e-commerce behemoth. Sales growth is positive, e-commerce sales are sizzling, and operating expenses are coming out of the system. Earnings growth is stable in the 5% range. Strategic initiatives such as online grocery are playing out well.

All in all, the Walmart growth story is back. Walmart once again stands on its own two feet as a global retail giant that is gaining market share.

WMT stock is back, too. It’s at all-time highs and has rallied nearly 25% year-to-date.

But WMT stock’s valuation is rich, much richer than it’s been in recent memory. So should you chase the momentum or fade the rally?

The Walmart Growth Story Is on Fire

Recent quarterly numbers have underscored that Walmart is successfully putting up a fight against Amazon. Traffic is trending up, leading to positive comparable sales growth. E-commerce sales have been growing in the 60%-plus range, and earnings are largely up after a period of continued declines.

As such, WMT stock has slowly been creeping up after its massive selloff in 2015.

But what has finally pushed WMT stock to all-time highs is guided numbers which underscore that growth this year is much more than just a blip. It’s the new trend.

Sales growth is expected to be 3% or more in 2019. Sales are only up 1.7% so far this year, so the 3%-plus guide is quite bullish and indicates that the Walmart growth story will only get better.

That 3% sales growth will be powered by robust e-commerce growth. E-commerce sales growth in the U.S. is expected to be about 40% next year. That growth will lap roughly 60% growth this year, so on a 2-year basis, Walmart’s e-commerce growth is quite impressive.

All told, the pedestrian sales growth coupled with some operating expense leverage and share buybacks (WMT announced a new $20 billion share repurchase program) will drive 5% earnings growth in fiscal 2019.

All signs point to that 5% earnings growth staying into the foreseeable future. Walmart is really building out its digital game, expanding into new markets like online grocery, and illustrating that it has the scale and know-how to continue to grow even in a dynamic retail landscape.

A stable 5% earnings growth rate is pretty bullish considering earnings have been in a free fall since fiscal 2015. The inflection from earnings degradation to stable earnings growth is why WMT stock has gone from under $60 in 2015 to over $85 today.

WMT Valuation Seems Full

But this rally seems like it’s maxing out.

WMT stock is now trading at 19.7 times this year’s guided earnings. As stated earlier, the growth outlook is very stable at 5% earnings growth per year. That isn’t much bang for your buck. After all, the market is trading at a similar multiple for just shy of 11% earnings growth over the next several years.

Moreover, WMT is trading at an insane premium to where it has historically traded over the past five years. The stock’s price-to-earnings multiple is as high as it’s been in five years and 30% above its five-year average. The trailing EBITDA multiple is right near a five-year high and nearly 15% above its five-year average.

On the flip side, Walmart is stable, and that stability should be awarded a premium multiple. Plus, WMT is a relatively full tax payer with an effective tax rate that consistently hovers above 30%. Meanwhile, annual pre-tax profits are consistently north of $20 billion. Therefore, any cuts in the corporate tax rate could add potentially billions of dollars to the bottom line.

So what do the numbers say? Well, if tax reform actually comes through, then WMT stock is a buy here. But if it doesn’t, then WMT stock’s valuation has grown far too detached from the company’s 5% growth potential.

Bottom Line on WMT Stock

The momentum is strong with WMT stock, so if you own it, I can’t blame you for continuing to hold.

I owned it (I’ve been bullish since July) and am using this rally to do some profit taking. The valuation has gotten ahead of itself here. The only way I see this valuation being justified is if serious tax reform passes soon.

I doubt that will happen and consequently believe the risk-reward skews toward the downside at these levels.

As of this writing, Luke Lango was long AMZN. 

 

 

 


Article printed from InvestorPlace Media, https://investorplace.com/2017/10/wal-mart-stores-inc-wmt-stock-higher/.

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