Everything has gone right for Wal-Mart Stores Inc (NYSE:WMT) of late. Not that long ago, Walmart looked like it was floundering, and WMT stock was buffeted by fears it would become a potential victim of online competition.
But Wal-Mart has fortified its own e-commerce business, and operational improvements have put the company, and WMT stock, back on track.
Indeed, WMT has gained some 80% just since late 2015. In 2017 alone, the stock gained 43%. And with WMT stock back to looking somewhat pricy, at nearly 22x FY19 analyst EPS estimates, there is a case to take profits here.
But Walmart stock is worth sticking with. The company looks perfectly positioned for where US retail is headed. Dot-com acquisitions, including the $3 billion-plus pickup of Jet.com back in 2016, will provide benefits going forward.
Walmart stock isn’t cheap, but that’s kind of the point. This shouldn’t be a cheap stock anymore. There’s enough to pay up for, and the market should continue to do so as 2018 rolls on.
2018 Should Be A Good Year
The move in WMT stock reflects a rather dramatic change in Wal-Mart Stores’ business. Bear in mind that in fiscal 2016 (ending January 31st of that year), Walmart sales declined year-over-year for the first time in its history.
Most concerningly, the company seemed to be losing on all fronts. E-commerce growth from Amazon.com, Inc. (NASDAQ:AMZN) threatened the in-store business.
Target Corporation (NYSE:TGT) was taking market share in that head-to-head battle. And dollar store operators Dollar Tree, Inc. (NASDAQ:DLTR) and Dollar General Corp. (NYSE:DG) were undercutting Walmart on the lower end.
But Walmart has righted the ship. It’s now it is Target that looks adrift, despite a recent rally in TGT stock. Jet.com has become the foundation of a best-in-breed ‘omnichannel’ offering, with Walmart even offering discounts to customers who pick items up. The dollar store operators continue to grow, but it’s supermarkets like Kroger Co (NYSE:KR) that seem to be losing share.
Notably, looking forward, there’s not much reason to see the current trend changing.
The Risks to WMT Stock
There are some risks here, particularly at the current valuation. But those risks appear manageable. Rumors of an Amazon-Target deal are a modest concern, as they would create a huge, nimble competitor. But I agree with Lawrence Meyers, who believes such a deal is not going to happen.
Pricing competition in grocery remains intense. But the sector has rallied of late, as fears that Amazon’s acquisition of Whole Foods would crush margins in the space look like they may have been overwrought.
And the recent, surprising, closures of 63 Sam’s Club locations seem to show some weakness in that business. Sam’s remains a distant second to Costco Wholesale Corporation (NASDAQ:COST). But Sam’s reportedly generates just 6% of Walmart earnings, not enough for any issues there to substantially damage WMT stock.
Macro concerns, as always, are an issue as well. But the economy looks strong, and Walmart often benefits when the economy turns, as customers more aggressively focus on price in their shopping.
There are risks here – but given the rewards, they’re risks worth taking.
Tailwinds for WMT Stock
Notably, the recent tax reform package should be a multi-faceted benefit for Walmart stock. As Goldman Sachs pointed out, the average taxpayer filing should benefit by over $1,000, increasing demand in Walmart’s key demographics.
The company itself will see lower taxes, and higher earnings. And it will be able to repatriate cash held outside the United States. Goldman argued that, as a result, Walmart is likely to raise its dividend, which already yields 2%.
Walmart already has used some of the savings to raise its wages and offer employee bonuses. Those higher-paid employees should ameliorate some of the service complaints that have dogged the retailer in recent years.
At the moment, then, there’s little reason to see the rally in WMT coming to an end. 2018 should be a solid year. Walmart seems like it’s back to being the ‘old’, dominant behemoth. With momentum fully behind Walmart stock, investors should ride that momentum as long as they can.
As of this writing, Vince Martin has no positions in any securities mentioned.