Walmart’s (NYSE:WMT) long-awaited 3-for-1 stock split arrived not with a bang on Monday, but a whimper, as shares of the retail mega-giant inched just 1.8% higher over the course of six-and-a-half hours of ho-hum trading. By the time the closing bell struck, Walmart shares were trading just shy of $60 apiece — but one analyst thinks they can go higher.
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Writing in the aftermath of the split, Evercore ISI analyst Greg Melich explained why he thinks Walmart stock, which he rates an Outperform (i.e. Buy), could go to $65 a share, and why he’s decided to raise his price target from $182 previously to $65 today ($65 today, of course, would be a price equivalent to about $195 before the split happened, so this really is a raised price target). (To watch Melich’s track record, click here)
Not to put too fine a point on it, but Melich sees Walmart in the “early days of a tech powered” acceleration of its business, in which “Walmart is winning customers, expanding margin and investing to widen their competitive moat.” Walmart’s online business, says the analyst, is key to both an acceleration in sales and an expansion in profit margins, and will provide about two-thirds of margin expansion through 2026. And this expansion is already underway.
Walmart beat on both sales and earnings last week, reporting sales of $173.4 billion and $1.80 per share in earnings — nearly 20% more profit than most analysts had predicted. The company also told investors to expect 4% to 5% sales growth in Q1, operating income growth of 3% to 4.5%, and adjusted profits north of $1.48 per share — ahead of Wall Street estimates.
Now, some investors might have been taken aback by Walmart’s guidance for sales to slow down later in the year. Management says full-year 2024 sales will grow only 3% to 4% — below the rate of growth expected in Q1. Still, management promised profits ahead of consensus predictions for the year as well. And according to Melich, Walmart’s guidance could turn out to be “conservative.”
Fact is, Melich thinks operating profits at Walmart could grow as much as 8% this year. For the time being, he’s actually predicting only 6% growth — $2.36 per share — in 2024. But as time goes on and Walmart’s tech-enabled progress accelerates, the analyst sees earnings growing 10% in 2025, to $2.60 per share.
The problem here, however, is kind of obvious — to value investors at least. If Walmart earns $2.36 this year, and if Melich thinks you should buy it up to $65, well, that’s a 27.5 P/E ratio he’s assigning the stock. This seems a bit rich given the analyst only sees earnings growing 10% next year (and very rich considering this year’s growth is going to be closer to 6% to 8%. It works out to a PEG ratio close to 4.0!)
Melich acknowledges that these valuations are at something of a premium to the S&P 500. He puts that premium at 20%, but he says that’s right in the 1.0x- to 1.4x-range of the premium investors have historically paid to own this “defensive” retail stock, and therefore a reasonable price to pay.
He may be right about that, and nervous investors looking for a safe stock to invest in might be safe owning Walmart stock. That being said, a cheap stock Walmart most definitely is not. If you’re looking for a bargain, you’re better off shopping at Walmart than you will be buying Walmart stock. (See WMT stock forecast)
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Disclaimer: The opinions expressed in this article are solely those of the featured analyst. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.
