Retail

Are Wal-Mart Analyst Upgrades Late to the Turnaround (or Just Getting Started)?

Jon C. Ogg

Published: September 25, 2016 10:40 am

Last Updated: January 13, 2020 3:11 am

Wal-Mart Stores Inc. (NYSE: WMT) has enjoyed a serious gain in 2016, but that was after the wheels fell of the Wal-Mart truck in 2015. Now the Dow Jones Industrial Average component and retail giant is up 20% year to date, and the stock is up almost 17% from a year ago. That will mask at least some of the notion that the shares were down 0.7% in the past week and are up a mere 0.2% in the past month.

24/7 Wall St. has noticed that some analysts have increased their ratings and targets on Wal-Mart in recent days in weeks. It is quite possible that these analyst calls will be viewed as being late to the Wal-Mart recovery party. Still, they needed to be looked at.

Wal-Mart was raised to Overweight from Equal Weight with an $87 price target at Barclays on Friday, September 23. The prior closing price was $72.19. Wal-Mart shares also closed up eight cents, or 0.11%, at $72.35 on Friday.

On September 16, Credit Suisse raised its rating to Outperform from Neutral. The firm also raised its price target to $80 from $62. The report said:

Walmart’s in-store investments and a better low-end consumer have yielded the return of traffic growth against a deteriorating staples retail landscape. While there is more work to do, early progress has been encouraging. We see a continuation of top-line momentum as management invests further, and although earnings growth is limited, risk to consensus looks low. This set-up should yield outperformance in an uninspiring coverage universe.

Back on September 14, 24/7 Wall St. featured Wal-Mart as one of four stealth stocks for a volatile market according to Jefferies. The report said at the time:

Our August pricing work showed that Walmart continued to invest in price, particularly in the dollar store and grocery baskets, which contain high visibility food and consumable SKUs. Based on our recent conversations with WMT, we believe they remain pleased with the results and expect expansion of this initiative. We expect the price investments to continue and cost out initiatives should fund this, so we reiterate our Buy rating.

On September 12, Cowen raised its rating to Outperform from Market Perform. The analyst also raised the price target to $83 from $76. Cowen’s view was that a good trend is your friend and they think it is still early enough to buy shares to see positive returns. Cowen said:

A combination of price investments, creative integration of physical + digital & the Jet acquisition position Walmart to regain retail dominance. WMT drivers & a healthy consumer should drive stable comps of 1-2% with upside potential. Importantly, we do not expect a negative surprise at Oct. analyst day & would be comfortable owning into event.

Also on September 12, Jefferies reiterated its Buy rating and its $86 upside price target. The firm said in that call:

Our August pricing work showed that Walmart continued to invest in price, particularly in the dollar store and grocery baskets, which contain high visibility food and consumable SKUs. Based on our recent conversations with Walmart, we believe they remain pleased with the results and expect expansion of this initiative. We expect the price investments to continue and cost out initiatives should fund this, so we reiterate our Buy rating.

JPMorgan has a mere Neutral rating, and on September 19 it lowered its price target to $74 from $75. This call was based on lowered estimates after factoring in the purchase price against earnings that it paid for Jet.com to better compete against Amazon. That price was $3 billion in cash, a portion of which is payable over time, and $300 million in Walmart stock. JPMorgan’s thesis and valuation said:

Walmart is in a period of wage, IT, and price investments for improving relevance in a rapidly changing, omni-channel retail world at the expense of medium-term profits. WMT’s large market share (20%+) and mix (55%) in the lower-growth grocery category make the transition more difficult from a financial perspective given the challenges growing traffic/comps. This plus the investment cycle suggest that earnings growth will continue to be challenged for the intermediate future.

Our December-2016 price target of $74 reflects our updated 2017 forecast and is based on ~16x P/E, which is one turn above its historical FY1 P/E valuation and slightly below its current valuation on FY16 estimate.

Wal-Mart shares closed at $72.35 on Friday, in a 52-week trading range of $56.30 to $75.19.

The retail giant has a consensus analyst price target of $74.99. What investors might want to look at is the consensus price target history from Thomson Reuters: $72.94 a month ago, $69.07 just two months ago and $69.11 three months ago.