Throughout 2019, I’ve pounded on the table time and again that shares of Walmart (NYSE:WMT) are due for a sizable rally (see here, here and here). Over six months into 2019, that sizable rally has happened. Walmart stock is up more than 20% year-to-date.
WMT Stock: The 3 Big Reasons to Buy Walmart Stock in 2019
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With shares having come so far, so fast, it’s reasonable to ask: is the big rally in WMT stock over? The simple answer: no.
Walmart stock still has more firepower left, and by the end of the year, should see prices close to $120. That implies another approximately 10% upside over the next several months.
Driving further upside in WMT stock into the end of the year will be three things:
Continued innovation and expansion at Walmart, especially in the omni-channel commerce world. A healthy U.S. consumer that will continue to power strong retail sales growth. A discounted valuation that creates runway for a higher Walmart stock price
Net-net, Walmart’s innovative growth strategy, against the backdrop of a healthy U.S. consumer and coupled with a reasonable valuation, should drive further upside in WMT stock over the next several months.
Walmart Is as Innovative as Ever
The first and most important reason to stick with this rally is that Walmart has ramped up its innovation.
Just consider all the things management has done this year alone to improve the company’s near and long-term growth prospects:
Walmart has shifted the focus from opening new stores to aggressively remodeling old ones, thereby improving the physical retail experience. This should help keep in-store traffic trends healthy for the foreseeable future.
The company is testing a grocery-delivery subscription program in a few cities. At the same time, they are testing in-home grocery delivery in a few cities too. In sum, these two growth initiatives could be the foundation for Walmart becoming the leader in grocery delivery. It’s a position which will ultimately be additive to revenue and profits in the long run.
Responding to Amazon (NASDAQ:AMZN), Walmart is testing the waters with one-day shipping. In order to make such rapid shipping more economically feasible, Walmart is simultaneously testing self-driving delivery. The combination of these two things should allow Walmart to up consumer convenience and increase wallet share, while mitigating a rise in expenses.
Walmart is now allowing customers to buy smartphones and smartphone plans online. This move should expand share of the e-commerce business.
Walmart is also aggressively expanding into the pet-care and kids-shopping categories, as well as considering an expansion into CBD. These three moves would expand the addressable market and should provide a growth tailwind.
Last, but not least, Walmart is building out a digital-ad business which could one day be hugely additive to the bottom-line (digital advertising is a high-margin business).
Overall, Walmart’s robust innovation today is dramatically improving the company’s near and long-term growth prospects.
The U.S. Consumer Is as Healthy as Ever
While WMT is boosting innovation, the American consumer has similarly experienced a lift in spending power over the past decade. Consider these facts:
The unemployment rate in America is at record-low levels, so pretty much everyone who wants a job, has one.
Wage growth is firing off at decade-high levels. For the first time since the 2008 financial crisis, Americans are getting a sizable raise.
Inflation remains muted, so all these gains in wages are real gains.
Interest rates are still very low, and will probably go even lower. Therefore, borrowing costs remain in favor of healthy consumer-expenditure trends.
Household debt levels are low, giving consumers the margin to spend without excess worries.
The personal savings rate in the U.S. is as high as it’s been since the 1990s, giving consumers additional buffer.
So long as these conditions remain favorable, the American consumer will continue to spend and remain confident. Subsequently, Walmart’s innovation will translate into steady sales and profit growth, lifting the Walmart stock price.
The Valuation on Walmart Stock Remains Reasonable
Underlying the favorable macro and micro conditions at Walmart is a reasonable valuation on Walmart stock.
To be fair, WMT stock now trades at over 22-times forward earnings. That’s as a big as the forward multiple has been in a long time. But given Walmart’s innovation and omni-channel success, corporate growth prospects are also better than they’ve been in a while.
Indeed, if you model everything out, today’s 22-times forward multiple on Walmart stock is quite sensible.
Walmart has consistently comped in the low-to-mid single-digit percentage range for the past several years. Given the company’s multiple growth initiatives, and the healthy consumer backdrop, this comp rate should persist for the foreseeable future. Margins in the core business should remain stable as cost-cutting measures are offset by a direct sales shift.
But the Flipkart business — the India-based e-commerce firm of which WMT acquired a controlling stake — should mature. Plus, profitability improvements over there should provide a mild margin expansion tailwind to the whole business. Digital-ad business expansion also has the potential to push margins higher.
Combined, Walmart projects as a low-to-mid single-digit revenue grower over the next several years. Margins should also trend gradually higher. Under those assumptions, I think $8 in earnings per share is doable by fiscal 2025.
Based on a forward price-earnings multiple of 20, that implies a fiscal 2024 price target for WMT stock of $160. Discounted back by 8% per year (below my normal 10% discount rate to account for the 2% dividend yield), that equates to a fiscal 2020 price target for WMT stock of nearly $120.
Bottom Line on WMT Stock
The bull thesis here is simple. Walmart stock is up big this year. Three things will keep this rally alive into the end of 2019: continued innovation in Walmart’s core business, a healthy U.S. consumer backdrop, and a reasonable valuation underlying WMT shares. Therefore, the big-box retailer’s equity has runway to $120 by the end of this year.
As of this writing, Luke Lango was long WMT and AMZN.
