Walmart’s Recovery Already Priced Into Walmart Stock

While the company should continue to grow, the impact to WMT stock may be limited

Walmart (NYSE:WMT) continues to progress in its transformation. Thanks to e-commerce successes, investors continue to flock to Walmart stock. Traders have seen gains of close to 25% since the beginning of the year. This has also brought success in an area where Walmart has seen many failures.

Walmart stock features interesting talking points but they're mostly priced in at this point.
Source: Sundry Photography / Shutterstock.com

However, Walmart stock has also doubled from its 2015 lows, when everyone feared a retail takeover by Amazon (NASDAQ:AMZN). The stock traded at 13-times earnings on average in 2015. Price-earnings ratios have now moved substantially higher.  Given these increases, investors must decide whether WMT can continue moving higher, or if it will face stagnation.

WMT Shows Improvement Online and Internationally

In 2015, Wall Street became deeply worried about the future of Walmart. With its e-commerce initiatives going nowhere, and a domestic market that had become saturated, the company began to see declines in same-store sales growth.

Moreover, Walmart’s expansion outside of North America had led to either stagnant growth like in China or embarrassing market exits such as the ones experienced in both Germany and Brazil.

However, at about this time, the company finally adapted to the changing retail environment, according to Jie Zhang. Dr. Zhang is a Harvey Sanders Fellow of Retail Management at the Robert H. Smith School of Business at the University of Maryland. Dr. Zhang said that the company adopted the e-commerce strategies of its rivals. This helped set the stage for the company’s recovery.

It has also helped WMT succeed outside of North America. A recent six-day sales festival in India yielded WMT record sales. This seems to confirm the wisdom of Walmart’s $16 billion purchase of Indian e-commerce company Flipkart.

Healthcare Becoming a Major Focus

The company has also worked to cut costs in healthcare for both employees and customers. For employees, they will promote fitness and video conferences with doctors. They will also test a concierge service that helps its workers with finding a doctor, billing, and appointments.

On the customer side, its supercenter in Dallas, Georgia will also operate a health clinic. This facility will offer an array of health-related services for “low, transparent” prices, serving customers regardless of insurance status.

On a mass scale, this could present a competitive threat to clinics and hospitals that have long offered services such as primary care, X-rays, EKGs, and counseling services with little competition or posted prices. If this changes health care services, one could see how this would generate interest in Walmart stock.

Watch Valuation and Overall Growth

However, the question is whether that buzz can translate into higher multiples. Here, WMT may run into obstacles. The WMT stock price is about $118 per share as of the time of this writing. The forward PE ratio of around 22.9 closely resembles the multiple of the S&P 500. This leaves the equity fairly valued at best.

For all of the talk of Walmart’s “comeback,” Wall Street forecasts profit growth of 0.2% this year and 3.9% in fiscal 2020. This lags growth rates of both Target (NYSE:TGT) and Costco (NASDAQ:COST). Moreover, the massive growth that characterizes its online sales still constitutes a small percentage of revenue.

Should I Buy Walmart Stock?

Such low growth numbers should cast doubt on the continuing comeback story for Walmart stock. WMT could easily turn if investors pay attention to the overall numbers. I could see a case for paying 22.9 times forward earnings if profit growth moved into the double digits.

However, with its earnings expected to grow in the low-to-mid-single-digits for the foreseeable future, investors may begin to question the wisdom of paying this valuation, especially when compared to some of its closest rivals.

In comparison, Walmart’s main rival in the grocery business, Kroger (NYSE:KR), will see similar growth. However, investors can buy KR stock at just 10.75-times forward earnings.

Moreover, TGT stock supports a lower forward PE ratio at only 16.5. Wall Street also believes that Target will offer 14.3% profit increases this year and high single-digit growth in future years. This comes in well ahead of the low single-digit increases expected for WMT. Furthermore, both Target and Kroger offer dividend yields of just over 2.5%, versus just over 1.8% for Walmart stock.

Clearly, Walmart has successfully adapted to the retail environment. Both the company and Walmart stock should continue a slow growth pattern over the long term. However, when it comes to investments in retail, investors have better choices.

As of this writing, Will Healy did not hold a position in any of the aforementioned stocks. You can follow Will on Twitter at @HealyWriting.


Article printed from InvestorPlace Media, https://investorplace.com/2019/10/recovery-already-priced-into-walmart-stock/.

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