Alongside the rest of the stock market, shares of global retail giant Walmart (NYSE:WMT) have rallied big in 2019. Year-to-date, with the S&P 500 up 15%, Walmart stock is up a very healthy 17%.
This big rally in Walmart stock is set to continue over the next few months for two big reasons.
First, Walmart is set to report second-quarter numbers before the market opens on Thursday, 8/15. Those numbers should be really good and should reaffirm that the U.S. consumer (and therefore Walmart) is doing really well. Walmart stock should consequently rally in response to a strong Q2 print.
Second, the recent drop in WMT stock price to levels below $110 has left the stock attractively undervalued. Fundamentals imply that this stock is supported at $120 by the end of 2019. Thus, with the stock now trading below $110 more than halfway through the year, near term upside potential is compelling.
Net net, Walmart stock looks good ahead of next week’s earnings report. This stock looks positioned for both a nice post-earnings and end-of-year rally.
Q2 Earnings Will Be Good
Walmart is set to report second-quarter numbers next week, and an overwhelming volume of data suggests that those numbers will be really good.
First, consumer confidence trends have improved dramatically over the past few months. In early 2019, consumer confidence and sentiment readings were depressed. Starting in March, they started to meaningfully rebound. They have remained strong ever since.
Second, as consumer confidence and sentiment has rebounded, retail consumption trends have improved. In the first quarter of 2019, U.S. retail sales growth was 2.7%. Growth accelerated to 3.2% in the second quarter. With respect to general merchandise stores specifically, sales growth accelerated from 1.6% in Q1, to 2.2% in Q2.
Third, the consumer discretionary sector has – thus far – broadly reported positive Q2 numbers. About 70% of consumer discretionary companies that have reported Q2 numbers so far, have reported above-consensus revenue numbers. About 75% have reported above-consensus profit numbers.
Fourth, Walmart has had so much momentum over the past several quarters (consistent 3%-plus comparable sales growth and 30%-plus digital sales growth over the past four quarters) that it is highly unlikely that the company missed out on this Q2 retail bump. Instead, given Walmart’s continued operational innovation and expansion, it is far more likely that Walmart was a big driver of the Q2 retail bump.
All in all, then, the data suggests that Walmart is gearing up to report another really good quarter, which will likely represent growth acceleration from last quarter. If so, that combination of strong and accelerating numbers should spark a nice post-earnings rally in Walmart stock.
Near Term Upside Potential Is Compelling
The post-earnings rally in Walmart stock should turn into an end-of-year rally towards $120.
Over the past several years, Walmart has found its winning stride, reporting comparable sales growth that has consistently hovered in the low-to-mid-single-digit percentage range.
Comps should remain in this range going forward, given the growth potential of the ecommerce business, the expansion of omnichannel capabilities, and the upside of Flipkart. Margins will simultaneously expand somewhat, as the Flipkart business grows and goes from losing money to making money, and as high-margin digital ad revenue becomes more meaningful.
Based on all those assumptions, I think Walmart’s earnings per share can reach $8 by fiscal 2025. Using a forward price-earnings multiple of 20, which is average for consumer discretionary stocks, that implies a fiscal 2024 price target for WMT stock of $160.
Discounted back by 8% per year (below my customary 10% discount rate to account for the 2% dividend yield of Walmart stock), equates to a fiscal 2020 price target for WMT stock of nearly $120.
That is where Walmart stock should trend by the end of this year, as favorable Q2 numbers give investors reason to remain constructive on the growth prospects of this business.
Bottom Line on WMT Stock
Walmart stock has been knocked down recently on trade war concerns. This is a dip worth buying. Next week, Walmart will report really good numbers, and investors will forget all about the trade war. Walmart stock will pop. It will stay on an uptrend towards $120 by the end of the year, mostly because the numbers will remain good here and the investor base will remain largely bullish.
As of this writing, Luke Lango was long WMT.
