Walmart Stock Is Rising Because an Analyst Took a Bullish ‘Leap of Faith’
Barron's
May 17, 2019
Walmart stock (WMT) is higher on Friday, helped in part by an upgrade from Gordon Haskett, which argues that there’s more reason to be constructive on the shares following Walmart’s upbeat earnings.
The Back Story. Walmart struggled in 2018, and the stock’s 9.3% year-to-date rise still puts it behind the broader market in 2019. However there has been more good news than bad this year. In February, the stock climbed on its fourth-quarter results, which demonstrated that the company’s strategy for growing e-commerce sales and taking market share in the grocery sector is on track. Analysts are largely upbeat about Walmart’s ability to reap the benefits of its investments in omnichannel options and technology, from curbside pickup to offering consumers the option to pay with Affirm’s installment loans. Walmart was able to shrug off the derailment of its merger deal with U.K. grocer J. Sainsbury, the company hiked its payout, and some see it as a relatively safe retail bet amid rising tariff tensions. Then there are other incremental positives that come online later, including potential CBD product sales.
Yesterday, the company reported a better-than-expected first quarter, which plenty of analysts praised.
What’s New. On Friday, Gordon Haskett analyst Chuck Grom boosted his rating on Walmart to Accumulate from Hold, establishing a new price target of $115 for the stock. He writes that Walmart’s sales have been healthy for more than a year, and while he had been held back on gross margins, the company’s earnings report yesterday alleviated those fears. (Gross margins were down, but to a smaller degree than expected.) He admits that “it’s arguably a ‘leap of faith’ to directly underwrite continued gains on this front (modeling modest contraction in the second through fourth quarters), our sense is that the company is making considerable progress in the U.S.” Grom cites a better product mix and private-label growth, along with easing transportation costs, and strong results for its online business.
Looking Ahead. Grom’s increased confidence points to continued strength in same-store sales, disciplined spending, and a better margin outlook, which should move U.S. earnings before interest and taxes margins higher the rest of this year and beyond. That led him to raise his earnings-per-share estimates through fiscal 2020, ahead of consensus.
And when it comes to tariffs, he doesn’t think we’ll get any clarity of agreement in the near term, but “we can’t think of a better company better equipped with scale/size (other thanCostco Wholesale (COST)) to manage through a scenario where prices move higher.”
As Barron’s noted yesterday, Walmart’s report wasn’t perfect, but it was heartening to see the company hit so many marks and flex its muscles in a way that’s comforting amid a difficult backdrop for retail in general.