Can Walmart Hit $113?

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About: Walmart Inc. (WMT)
by: David Butler

Summary

In a market that's definitely taking a turn, I say look for solid names at good prices.

Walmart's stock is down less than 5% in the market's recent pullback.

With a growing online presence, with overall momentum in earnings thus far in 2018, I like Walmart right now.

It's a bold statement in this market, but I think Walmart (WMT) can definitely hit a recent price target hike of $113. I think the retailer is going to come off that second quarter net loss (which had more to do with one-time items, rather than declining sales) and report big in the third. The general investment in online grocery, pickup services, and overall strength of their revenue growth, in general, mean this stock can definitely live up to Deutsche Bank's (NYSE:DB) new upgrade. The markets are starting to get more and more cautious about what to invest in, and I think investors will flock to a name like Walmart if they can provide proof that this year's estimates are reachable. The company is one of the few grocers with the sheer leverage that can make their programs compete with Amazon (AMZN) and Costco (NASDAQ:COST).

Walmart took a hit in fiscal Q2'19, reporting a net loss of $861 million. When you dive into it, the loss really didn't stem from poor sales growth. Excluding losses related to selling some assets, Walmart actually reported adjusted earnings of $1.29 per share with same-store sales up 4.5%. The company also iterated that online sales had increased 40% that quarter. As you can see, the momentum has been here. With the economy doing just fine, I don't see many signs that the third quarter should lose that momentum. If anything, timely investment in new initiatives like order/pickup should strengthen the company's performance.

Bridging the gap between online and brick/mortar

I'm a huge fan of this new service where you can order your groceries online and pick them up at the store without needing to walk around. Would I ever personally use it? No. I like to pick my own fruits and vegetables that aren't bruised thank you very much. But the average "neurosis free" consumer is going to love this. It's particularly convenient for the elderly and those that may suffer from mobility problems. The service creates a complimentary niche between the retailers' efforts to increase e-commerce, while also adding benefits to its vast physical store network. Picking things up at the store means that consumers will still be enticed to run into the store for anything they might have forgotten. Vice versa, you may get on the company's website to set up your pickup order, and then find yourself looking at deals on TVs. It's a strategy that Home Depot (HD) has implemented with great success.

To me, this is the part of the business that has potential to drive huge gains for Walmart moving into next year. I'm a firm believer that retail will never be dominated by online markets. I truly believe there's a balance that has yet to be found between online vs. brick and mortar. If Walmart can initiate programs that bridge the gap, they're ahead of Amazon, which has only recently started pushing harder into physical stores. Furthermore, Walmart has a distribution system that Amazon dreams of. The intermingling of their physical retail business with online offerings creates the means for Walmart to have huge growth potential in e-commerce.

Current quarter estimates seem to be putting the average EPS at around $1.02 and the fourth quarter at $1.35. I personally think we might see a beat here in the third quarter in large part to higher than expected online sales growth. If you couple that with the high retail forecasts for the holiday season, I think there's real potential here. As long as Q3 results don't come in completely awry, I think Walmart can hit full-year estimates of $4.82. It would be a rebound from last year's weaker overall income as the company revamped its game plan for an altered retail environment. It also would mean the stock is trading at around 20x forward earnings. In this market environment, that's not a bad price for a company like this.

Equities have been decidedly shaky lately as rates are making everyone nervous. I think it's fair to say that emphasis for the rest of the year will not be on overvalued tech companies. To that end, I see traders and investors alike looking for more stable/reliable ventures. Walmart is one of those names. If they can make some news with their fiscal Q3 results, I think you'll see Wall Street putting more money into WMT. To that end, a 20% run to $113 doesn't seem unattainable. It would only drive the P/E ratio up to 23.4, which is still a fairly cheap price in the current market. I think investors are looking for a new angle, and boring old Walmart might just be it. Why pay well over 100x earnings for something like Amazon if Walmart can deliver 40% online sales growth for a premium of around 23?

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.