Stock Analysis & Ideas

Walmart is Still a Buy Despite Rising Inflation, Says Analyst

Story Highlights

Walmart is facing the problem of rising inventories and a difficult macroeconomic environment. But analysts continue to be bullish about the stock even in such a scenario. Let us look at the reasons why analysts are upbeat about the stock.

Shares of Walmart (NYSE: WMT) have not fared well recently and have tanked 19.4% in the past month alone. Currently, the stock is hovering around its 52-week low with a closing price of $119.41 on June 13.

This drop in the stock price has been further exacerbated by Walmart’s disappointing Q1 results, which saw its operating income fall 23% year-over-year to $5.3 billion in Q1.

The retail sector has been adversely impacted due to multiple headwinds of soaring inflation, tight supplies, and labor shortages. In this scenario, are investors correct to be pessimistic about this retail giant?

Baird analyst Peter Benedict believes there are reasons to continue to be bullish about Walmart. The analyst reiterated a Buy rating and a price target of $155 on the stock following his meeting with shareholders. Benedict’s price target implies an upside potential of 29.8% at current levels.

The analyst outlined his reasons for being upbeat about the stock in his research report. Let us take a look at these reasons.

While Benedict acknowledged the current challenges for WMT in terms of a reduction in consumer spending due to rising inflation and the rollback of government stimulus, the analyst pointed out that the management’s “top priority is to drive sales and deliver value to consumers.”

The analyst pointed out that with WMT’s well “entrenched EDLP [every day low price] mindset and unique opportunity to leverage proven inflation “playbooks” from their international operations, we believe WMT is well positioned for share gains in a more value conscious consumer environment.”

One of the key factors that dragged down WMT’s operating income in Q1 was its rising inventories. The retailer’s management stated on its Q1 earnings call that its inventories are up 32%, higher than its own estimate, mainly in the discretionary general merchandise category.

However, Benedict is of the view that Walmart’s management is being “proactive in addressing the issue, including expanding rollbacks and adjusting future orders in certain spots.” While the analyst remained encouraged “to hear that consumers are responding to rollbacks, but believe it will likely take a quarter or two to fully right size positions.”

The analyst approves of WMT’s current CEO, Douglas McMillon’s, strategy to develop Walmart into a “more nimble, fully integrated omni-channel retailer” especially, when “many traditional retailers are losing relevancy with consumers.”

In a bid to extend its leadership as an omni channel retailer, WMT now expects its capex for FY23 to be in the upper range of 2.5% to 3% of net sales. The focus of the capex spend would be more on automation, supply chain, technology, and “customer-facing initiatives.”

Analyst Benedict believes that “WMT is investing from a position of strength, and the step-up in capex should extend WMT’s omni-channel leadership in the marketplace and fuel faster (and more profitable) growth over the intermediate/long-term.”

As a result, the analyst likes “WMT’s blend of defensive near-term appeal and disruptive longer-term optionality.”

Wall Street’s Take

Other analysts on the Street also echo Benedict and are upbeat about the stock with a consensus rating of Strong Buy based on 22 Buys and five Holds. The average WMT price target is $157.27, which implies a 31.7% upside potential to current levels.

Bottom Line

It seems Walmart is well-positioned to weather the current volatile macroeconomic scenario. Even investor sentiment is very positive about the stock, as indicated by the Crowd Wisdom tool on TipRanks.

This tool indicates that over the past 30 days, among top investors’ portfolios on TipRanks, 12.4% of portfolios increased their holding of WMT.

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