Analysts suggest paying attention to Walmart stock
WALMART
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when the market opens tomorrow. The retail giant will publish its financial reports and the estimates are that it will exceed market expectations, mainly thanks to a strong holiday period, and it is not impossible that the company’s stock will rise as a result.
Wall Street predicts that Wal-Mart will post an adjusted profit of 1.51 per share on revenues of 159.76 billion dollars. Same-store sales, an index that tracks revenue in stores open for more than a year, are expected to increase by 4.9%. For nine of the past 10 consecutive quarters, Walmart has beaten same-store sales expectations, and Wall Street believes the company has a good chance of doing the same tomorrow.
On Friday, Evercore ISI analyst Greg Melich added Walmart to his list of positive tactical trading ideas, writing that same-store sales are “expected to beat expectations,” which translates to an increase in profit. A tactical call describes an event or catalyst in the near term that may subsequently swing the stock price. Key to Walmart’s same-store growth has been its grocery business, which has gained market share as inflation has pushed shoppers to seek better deals. Walmart’s management team has repeatedly said the company has seen an uptick in visits from higher-income shoppers looking to stretch their budgets, a trend analysts say could carry over into the rest of the year. “Walmart’s price leadership and strong exposure to grocery and other high-frequency items position it well to benefit from an increasingly robust consumer in 2023,” wrote CFRA analyst Arun Sundaram.
But if the stock’s recent performance is anything to go by, not everyone agrees with Sundaram and Melich’s optimistic outlook. Walmart shares have barely moved all year, up 2.3% year to date, underperforming both the S&P 500 which rose 5.5% and the SPDR S&P Retail fund’s 17% gain.
There are two factors holding investors back: earnings and outlook. The company’s gross margins have struggled recently, pressured by increased forecast and operating costs. Some of these factors may be abating — transportation spending, for example, is set to decline in 2023, analysts say, and Walmart is likely to have moved past the excess inventory that led to price cuts. But there are still lingering pressures, including higher labor costs and slowing demand for high-margin products such as electronics, apparel and other discretionary items, Sundaram wrote.
A bigger concern is that Walmart could issue cautious forecasts for fiscal 2023 — a likely scenario given that consumers, especially those with lower incomes, could face a challenging year. The debate here is whether the market has already factored in a more subdued forecast. If so, the stock may rise. If not, then there is a chance that the stock could continue to level off, or go down. Walmart shares are currently trading at a multiple of 22 and above competitor Target’s 18.6. Christopher Horbers of JP Morgan says the stock looks fairly priced in his opinion.
“Succinctly stated, given full valuation, lack of inflation, real economic risk to their core consumer (with challenges to retain higher-income consumers in the recovery), and the view that the Fed will eventually cut, we believe the stock will remain limited,” Horbers wrote.
Walmart and Home Depot
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Both will be reported before the opening of trading. Forecasts from both companies generally set the tone for the remainder of the retail earnings period, Horbers wrote. This time, the degree of caution expressed by two of America’s largest retailers could change expectations for the companies that follow, he added.
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