Does Walmart Have More Upside?

After a 27% rise since the March lows of this year, at the current price of around $131 per share, we believe Walmart’s stock (NYSE: WMT) still has more to go. The big-box retailer has benefited from the shift to e-commerce due to its longtime omnichannel approach – as its digital sales grew a robust 74% in Q1. It invested heavily in same-day fulfillment service, including curbside pickup, all this while leveraging its brick-and-mortar stores. In fact, the company’s business model works in both good and bad economic times – using its massive economy of scale to pass cost savings on to customers.

Walmart’s stock is already about 30% higher than it was at the end of 2017 (fiscal 2018), a little over 2 years ago. Our dashboard, What Factors Drove 30% Change in Walmart’s Stock Between Fiscal 2018 and Now?, provides the key numbers behind our thinking, and we explain more below.

Some of this growth over the last 2 years is justified by the roughly 5% increase in Walmart’s revenues from $500 billion in fiscal 2018 to $524 billion in fiscal 2020. In addition, earnings growth, on a per-share basis, was higher by 59%. This was driven by an 80 bps net margins expansion from 2.1% to 2.9% and a 5% decline in shares outstanding during this period. However, GAAP growth can largely be attributed to non-cash and one-time expenses. It should be noted that the company’s earnings growth, on a non-GAAP basis, was up by only 12% between fiscal 2018 and 2020.

Finally, Walmart’s P/E ratio declined from about 30.8x at the end of FY 2018 to 21.7x at the end of FY 2020. While the company’s P/E is now around 25.2x, it could expand further as the demand for groceries remains high in the near term. We believe the stock is likely to see more upside despite the recent rally.

So how has Coronavirus impacted the stock?

The Covid-19 crisis boosted sales of essential products at both Walmart’s online and brick-and-mortar stores. Consequently, the retailer’s revenue grew 9% year-over-year (y-o-y) to $135 billion in Q1. Its U.S. comparable sales surged 10% y-o-y, driven by food, consumables, health & wellness, and some general merchandise categories. To break this down further, average ticket prices were up 16.5% during the quarter, while transactions fell 5.6%. The company also reported an adjusted EPS of $1.18, up 4% y-o-y. While Walmart had $900 million in incremental Covid-19 expenses due to special bonuses to hourly employees and higher wages in fulfillment centers during the quarter, its stronger revenue growth offset those expenses.

Walmart’s e-commerce sales expanded during the pandemic, surging 74% in Q1 ended May 1. This makes for an attractive time to launch an e-commerce-focused subscription service. The retailer is reportedly launching a new loyalty program Walmart+ at $98/year (lower than the $119/year subscription of Amazon Prime). This service will expand upon its existing same-day grocery delivery service, Delivery Unlimited – with discounts on fuel, early access to product deals, and other perks such as reserved delivery slots. By leveraging the company’s advantages in grocery and its store base, the new service can boost sales, lock in a loyal customer base, and reward customers.

There’s been a secular trend of grocery sales moving online for the last few years, and the coronavirus crisis may have accelerated that trend. Walmart has adapted to the new normal and most likely shoppers trying out online grocery will continue to do so post-pandemic as well. But Walmart needs to translate the continued online grocery ordering into more general merchandise sales in order to make this online segment profitable. Going by our Walmart’s Valuation, with an EPS estimate of around $5 and P/E multiple of 27x in fiscal 2021, this translates into a price of $135, which is marginally ahead of the current market price.

While Walmart’s stock may have a slight near term upside, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 Mid-Cap SaaS Stocks: PCTY, NEWR, CLDR, ALTR, MIME look attractive.

Did you know that Target stock has also fared well due to the stay-at-home bump as it saw a worried public stocking up on food and essentials? We discuss more on this here – What Factors Drove 96% Change in Target’s Stock Between 2017 and Now?

In addition, our dashboard forecasting US Covid-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a complete macro picture. Additionally, the complete set of coronavirus impact and timing analyses is available here.

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