The shares of Walmart (NYSE:WMT) have fallen sharply in recent weeks, but there are now signs the stock is on the mend and could rise even further over the short to medium term. The steep winter decline did bring Walmart's valuation down sharply, close to its historical one-year forward PE ratio. However, if there's one thing that can hurt Walmart over the long term, it's historically not cheap.
Currently, the stock trades for 24 times fiscal 2023 consensus earnings estimates of $5.85 per share. That's well above the historical one-year forward PE ratio average of 19.9 over the past five years. However, it's below the stock's highest PE multiple of roughly 26.5, last witnessed around November 2020. Again, this suggests that short term the stock could see upward multiple expansion especially given the tremendous amount of stimulus the US government is now rolling out. However, longer term, it may pose a challenge for the shares as the effects of the stimulus wear off, slowing earnings growth rates.
Even compared to some of its peers, the stock isn't cheap, trading with the second-highest one-year forward PE ratio, only behind Costco's (COST) 32.9. The group ex-Walmart trades with an average PE ratio of 20.2 while commanding an average growth rate for 2022 of 9.1% and 7.9% the year for 2023. Walmart is expected to grow earnings in calendar 2022 by 8.6%, followed by earnings growth of 9.1% in 2023.
However, the stimulus's benefit could provide an upside surprise for Walmart when they report fiscal first quarter 2022 results in the middle of May. Analysts are currently looking for earnings to grow by 2.1% to $1.20 per share, while revenue is forecast to decline by 2% to $131.9 billion. Over the past 12 quarters, Walmart has reported earnings results ahead of expectations 10 times.
That track record could be leading some options traders to bet that the stock continues to advance into those quarterly results. Currently, an options trader is betting that Walmart pushes higher, based on a significant increase in the open interest level for expiration on May 21. The data shows the number of open contracts for the $150 calls rose by around 16,000 on April 7 and were bought for about $1.10 per contract. It would suggest that Walmart rises to approximately $151.10 by the expiration date, a gain of an additional 8% from its current price of $140 on April 7.
The technical chart agrees that over the short term, the stock can rise further. The stock is currently resting on a level of resistance at a short-term downtrend that started when the equity peaked in December. Should the stock rise above that downtrend, it could result in the equity filling a technical gap at roughly $145. The relative strength index is rising, and it does suggest that bullish momentum is entering the stock.
However, if the stock fails to push through resistance at the downtrend, it could result in the shares falling back to their next level of support, around $136.
Overall, Walmart shares appear to be well-positioned to see short-term gains, and just how far they rise may be entirely dependent on expectations for future earnings growth. If the company can deliver strong results, analysts may boost estimates, helping to lift the stock to even higher prices. However, in the absence of improving earnings growth, the longer-term story may be a struggle.
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