Wal-Mart (WMT) Well Poised On Growth Track: Should You Hold?
Zacks Investment Research | Dec 07, 2016 04:37AM ET
Wal-Mart Stores, Inc. (NYSE:WMT) has exhibited a bullish run on the index year to date. We note that in the said period the stock has surged 14.8% and comfortably outperformed the Zacks categorized Retail-Supermarkets Market industry, which showcased growth of just 7.8%. We believe there still much value left in the stock, which is quite evident from its Value score of ‘A,’ Growth score of ‘B’ and VGM Score of 'B.'
What further makes us optimistic about its performance in the near term is its low beta of 0.11 and long-term earnings growth rate of 5.3%. The stock carries a forward P/E ratio of 16.3 compared to the Retail-Wholesale sector’s P/E ratio of 23.8. The stock is underpriced now and there is scope for further appreciation.
Further, the retailer has delivered positive earnings surprises in the past five consecutive quarters.
However, we note that the giant retailer has been facing several challenges.
Near-term Challenges
The company is exposed to intense competition on all fronts, from dollar stores to traditional grocery store chains and online business. Its international operations are also under pressure with a stronger dollar eating into sales.
Wal-Mart continues to invest in its e-commerce business to compete with online retailer Amazon.com, Inc. (NASDAQ:AMZN) . Hence, it expects to incur huge e-commerce expenses over the near term, given the shipping costs and price competition involved in it.
Wal-Mart has also pledged to invest $2.7 billion on raising employees’ wages and giving them extra training in fiscal 2017. Under the initiative, the company had increased its minimum wage to $9 an hour in Apr 2015, and to $10 per hour in Feb 2016. The initiative of paying higher wages is expected to help reduce turnover and increase retention.
The company will also improve its customer service and this should ultimately encourage shoppers to spend more. However, it will further raise the expense burden on the retailer. Higher labor costs, along with the company’s efforts to overhaul its stores and invest in its online operations, will weigh on earnings.
The industry-wide weakness in the grocery/supermarket business is impacting Wal-Mart’s operations. The industry is grappling with food deflation, stiff competition, aggressive promotional environment and waning store traffic. These headwinds have largely impacted major food grocers like Wal-Mart, The Kroger (NYSE:KR) Co., Whole Foods Market (NASDAQ:WFM), Inc., SuperValu, and Sprouts Farmers Market.
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Optimism Regarding the Stock
Despite prevailing headwinds, it is encouraging to note that the company is making efforts to understand the evolving needs of its customers to regain their confidence, and thus boost sales.
Wal-Mart continues to impress investors with positive comps at Wal-Mart U.S. for nine successive quarters, buoyed by a 0.7% increase in traffic. Moreover, traffic improved for the eighth consecutive quarter, owing to the company’s efforts to modernize its stores for higher footfall. Traffic also increased due to an improvement in consumer spending.
Bentonville, AR-based Wal-Mart also aims to expand its online business through acquisitions. Recently, the company acquired U.S.-based e-commerce company, Jet.com, Inc. and is also in talks to invest in India's largest e-commerce firm, Flipkart Online Services Pvt. in order to expand in the fast-growing online retail market and grab market share in the country.
Apart from acquisitions, Wal-Mart has also launched its own mobile payment system called Walmart Pay. This allows shoppers to pay through its existing smartphone app. Wal-Mart is also aggressively trying to get a share of online grocery delivery, a booming industry.
We expect the aforementioned factors to help this Zacks Rank #3 (Hold) company to sustain its strong momentum and stay afloat even amid difficult times. Hence, we suggest investors to hold on to the stock as the rest is a wait-and-watch story.
Stocks to Consider
Some better-ranked stocks in the broader retail sector include Best Buy, Inc. (NYSE:BBY) , and The Children's Place, Inc. (NASDAQ:PLCE) . Both of them sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
While Best Buy has an expected earnings growth rate of 11.87%, Children’s Place has an expected earnings growth rate of 10.33%.
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