Will Wal-Mart Keep Beating The S&P 500?

| About: Wal-Mart Stores, (WMT)

Summary

Wal-Mart has outperformed the S&P 500 in 2016 and we think it has sufficient catalysts to continue to do so.

Its e-commerce and supply chain innovation, as well as investment in staffing and improved customer service, could push its profitability and share price higher.

Portfolio rationalization, positive currency translation and a more ethical offering could also cause Wal-Mart’s valuation discount to the S&P 500 to narrow moving forward.

Since the turn of the year, Wal-Mart (NYSE: WMT) has outperformed the S&P 500 by around 14%, with the retail major's shares being up by 17%. This may cause many investors to determine that now is a good time to sell Wal-Mart since profit taking may take place, and with the company still being in the midst of major change its future is not without risk. However, we believe that Wal-Mart will continue to beat the S&P 500 moving forward with a number of key catalysts set to have a positive impact on the company's share price.

One of the key reasons why we believe Wal-Mart will keep outperforming the S&P 500 is its investment in customer service. With the retail sector being a more competitive place than ever right now, differentiation between retailers could prove to be key to customer loyalty and profitability.

With Wal-Mart investing heavily in improved store design, layouts and in improving the job opportunities and training for its staff through investing $2.7bn over the next two years, customer loyalty could increase and allow Wal-Mart to develop additional price improvement capabilities vs. its peers. This could prove to be a positive catalyst on not just the company's bottom line, but also on investor sentiment and its share price.

In addition, Wal-Mart is investing heavily in innovation. This has multiple strands, with its website and e-commerce space being one, while another is the company's supply chain.

In terms of e-commerce, Wal-Mart has expanded its Online Grocery to 150 locations across more than 20 US markets and has ramped up in-store and in-club pickup, while also acquiring the Chinese online retailer Yihaodian. This should provide Wal-Mart with greater relevance among customers in an increasingly interconnected world, which we think could positively help Wal-Mart's top and bottom line performance.

Meanwhile, Wal-Mart is seeking to improve the efficiency of its supply chain so as to keep costs down and margins higher. For example, it has expanded its fleet of highly automated, next-generation fulfilment centers across the US, with such changes having the potential to positively help profitability, investor sentiment and cause a rising share price moving forward.

In addition, with Wal-Mart seeking to make its supply chain and overall business operations more ethical in terms of buying more products from women-owned businesses and hiring veterans, we feel that it is becoming increasingly proficient at connecting with customers on a more personal level. In other words, customers are becoming increasingly conscious of being ethical and in our view Wal-Mart's move toward this space should resonate well with its customers and develop greater customer loyalty. In our view, this increasing loyalty could lead to improved pricing potential which could improve Wal-Mart's profitability as well as its share price outlook.

With Wal-Mart being a truly global retailer, its significant exposure to non-US markets could cause it to benefit from a weakening US dollar moving forward. In our view this will take place due to a slower than expected increase in interest rates, with the Federal Reserve adopting a more dovish stance than had been expected a number of months ago. As such, Wal-Mart's currency translation may be provided with a short-term boost which in our view has the potential to improve investor sentiment in the stock and push Wal-Mart's share price higher.

Clearly, there are parts of Wal-Mart's business which are not performing well. For example, the UK remains a highly competitive space and Wal-Mart's Asda division is suffering from an environment where food price deflation is a persistent challenge. Furthermore, Wal-Mart has experienced underperformance from stores in Latin America and in Canada, which have acted as a drag on its overall profitability and may cause some investors to doubt the company's growth potential.

However, with Wal-Mart rationalizing its store portfolio through selling off underperforming stores in Latin America and Canada, while exiting its bank operations in Mexico, it seems to be taking the right decisions in our view to set itself up for positive growth moving forward. As such, we think that Wal-Mart is improving its competitive position and profit outlook through rationalization, which could positively help both its financial and share price performance.

With Wal-Mart trading on a forward P/E of 16.3 vs. 17.9 for the S&P 500, we think that it offers good value for money compared to the wider index and that it could be due for an upward rerating moving forward. That's especially the case due to Wal-Mart's positive catalysts, such as investment in its e-commerce capability and supply chain, positive currency translation, improving the customer experience through staff training, a rationalization program and a more ethical position. All of them are key reasons why we think that Wal-Mart's shares will continue to beat the S&P 500 moving forward.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.