Earnings Beat In The Cards For Walmart Stock?

Walmart (NYSE: WMT) is scheduled to report its fiscal fourth-quarter results on Thursday, February 18. We expect WMT to likely beat the revenue and earnings expectations, driven by growth across all reporting segments-Walmart U.S, Walmart International, and Sam’s Club. The big-box retailer has benefited from its low prices and improving digital presence – all this while leveraging its vast network of brick-and-mortar stores. We expect the company to continue to modestly outperform the market in the upcoming Q4 release, thanks to its leadership position and improving earnings outlook.

Our forecast indicates that Walmart’s valuation is $150 a share, which is 4% higher than the current market price of over $144. Look at our interactive dashboard analysis on WMT’s pre-earnings: What To Expect in Q4? for more details.

(1) Revenues expected to be marginally ahead of consensus estimates

Trefis estimates Walmart’s Q4 2021 revenues to be around $149.6 Bil, marginally ahead of the consensus estimate of $148.4 Bil. The Covid-19 crisis boosted sales of essential products at both Walmart’s online and brick-and-mortar stores. Consequently, the retailer’s revenues grew 6% year-over-year (y-o-y) to $407 billion in the first three quarters of fiscal 2021 (year ended Jan 2021). The company showed off its progress on this score by posting 10% higher comparable-store sales in fiscal Q1, a 9.3% boost in Q2, and a 6.4% increase in Q3. In fact, the company’s push into digital initiatives seems to be working as almost 90% of the increase in Q3’s (ended October) U.S. comps came from e-commerce sales. We expect the company to continue to ride on this growth momentum in Q4 as well.

Walmart’s e-commerce sales soared during the pandemic, surging 74% in Q1, 97% in Q2, and 79% in Q3 – making way for an attractive time to launch an e-commerce-focused subscription service. The retailer launched a new loyalty program Walmart+ at $98/year (lower than the $119/year subscription of Amazon Prime) in mid-September. This service expands 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 likely boost sales further, lock in a loyal customer base, and reward customers. That said, the company’s business model works in both good and bad economic times – using its massive economy of scales to pass cost savings on to customers.

2) EPS likely to be well ahead of consensus estimates

WMT’s Q4 2021 earnings per share (EPS) is expected to be $1.59 per Trefis analysis, almost 6% above the consensus estimate of $1.50. While the retailer saw incremental Covid expenses so far this year due to special bonuses to hourly employees, higher wages in fulfillment centers, and an exponential increase in digital sales during the quarter, its stronger revenue growth helped to offset those expenses.

For the full-year, we expect Walmart’s net margin to grow slightly from 2.8% in fiscal 2020 to 2.9% in fiscal 2021. This coupled with a 5% y-o-y growth in Walmart’s revenues, could lead to a rise of $1 billion y-o-y in net income to $15.9 billion in 2021. All this, resulting in a possible EPS increase from $5.22 in FY 2020 to around $5.56 in FY 2021.

(3) Stock price estimate higher than the current market price

Going by our Walmart’s valuation, with an EPS estimate of around $5.56 and P/E multiple of 27x in fiscal 2021, this translates into a price of $150, which is 4% higher than the current market price of over $144.

While WMT stock looks attractive heading into its Q4 release, 2020 has created many pricing discontinuities that can offer attractive trading opportunities. For example, you’ll be surprised how the stock valuation for Starbucks vs Home Depot shows a disconnect with their relative operational growth. You can find many such discontinuous pairs here.

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