I am bullish on Walmart (NYSE: WMT) as its solid growth outlook, support from Wall Street analysts, and decent upside potential relative to its consensus price target indicate that it could be a good time to add shares.
Walmart started out as a very small retailer in Rogers, Arkansas, but has grown into a vast retail empire with thousands of stores in the United States and across the world in 24 different countries, with 2.2 million associates.
Strengths
Walmart prides itself on pursuing continuous innovation, a strategy that has worked as it expands into large chain groceries and mobile applications. Its main thrust is known as “Every Day Low Price” (EDLP), which is essentially putting the customer at the center of its business strategy.
The company operates three store formats: the Walmart Supercenter, the Walmart Discount Store, and the Walmart Neighborhood Market. Each of these formats fulfills a specific need.
The Supercenter focuses on making a large-chain grocery experience for customers, while the Discount Store carries electronics, furnishings, apparel, and other similar items. The Neighborhood Market is a smaller option for communities that need accessible pharmacies and groceries.
Walmart is a leading retail innovator in terms of combining technology with the traditional brick-and-mortar storefront. While its stores remain packed full of items, customers can browse the online store and pick up their groceries at their preferred time.
The company also provides a Mobile Scan & Go feature. These developments have helped the company retain its strong user and customer base, with over 100 million unique users each month. In a day and age where the Internet is vital to customers’ everyday lives, sustaining these statistics is impressive.
The company’s 2016 acquisition of Jet.com has been very profitable, with a huge expansion in its e-commerce business following from it. It also acquired Hayneedle – an online home furnishings store – to further strengthen its e-commerce business.
Recent Results
Walmart’s generated increased market share in the U.S. in its most recent quarterly report, driven by an increased online presence and enhanced customer e-commerce experience, which generated 7% quarterly growth in eCommerce sales.
With COVID-19 restrictions and fears easing in many parts of North America, more customers are returning to the physical stores, helping the brick-and-mortar sales numbers to perform well, and facilitate a 6% overall sales growth number for the company.
Walmart continues to invest heavily in key international growth markets, particularly India, Mexico, China, and Canada. The company also signaled confidence that the holiday season would provide a strong tailwind for the company’s sales and profits.
Valuation Metrics
WMT stock looks reasonably priced here as its EV/EBITDA ratio is 11.7x compared to its five-year average of 11x, and its P/E ratio looks quite reasonable at 21x, especially compared to its five-year average of 21.5x.
Moreover, the company expects fiscal 2022 revenue to grow by 2.2% and then fiscal 2023 revenue to grow by 3%.
EBITDA will also see solid growth, with expectations that it will rise by 7.6% in fiscal 2022 and 3.3% in fiscal 2023.
Net normalized income is set to soar by 15.4% in fiscal 2022, and follow that with 2.8% growth in fiscal 2023.
Wall Street’s Take
From Wall Street analysts, WMT earns a Strong Buy analyst consensus based on 15 Buy ratings, three Hold ratings, and zero Sell ratings in the past three months. Additionally, the average Walmart price target of $172.11 puts the upside potential at 23%.
Summary and Conclusions
Walmart is a leading retailer with a massive store presence that gives it a wide moat in the United States through significant pricing power and economies of scale.
It is also pursuing impressive growth initiatives through its international investments and e-commerce business. Given the strength of the business model, an uncertain macroeconomic environment, and its reasonable valuation, there seems to be potential here.
Disclosure: At the time of publication, Samuel Smith did not have a position in any of the securities mentioned in this article.
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