Is Walmart worth US$140 a share?

US hyper supermarket chain Walmart (NYSE: WMT) is due to report results for its second quarter of financial year 2021 before the market opens on Tuesday 18 August 2020.

Below, we highlight three key considerations that investors should pay attention to ahead of Walmart’s upcoming earnings report.

Walmart stock have rallied 14% since July 2020

Walmart’s share price has risen as much as 13.5% since early July 2020, with investors remaining optimistic on the stock even as the Covid-19 pandemic worsened.

The Walmart stock climbed 7% on 07 July 2020 alone, after the company announced the upcoming launch of a new premium subscription service akin to Amazon Prime called Walmart+.

The launch of Walmart+, originally slated for late March, then pushed back to late July due to the pandemic, has once again been delayed. There is no official word on a new release date.

Nevertheless, the general expectation is for the premium same-day delivery grocery service – which will reportedly cost US$98 per annum – to be competitive in a landscape currently dominated by Amazon.com.

Walmart’s share price has also been a beneficiary of higher sales this year, thanks to panic buying caused by Covid-19. The company’s net sales increased 10.5% in the first quarter, with e-commerce revenue soaring 74% for the same period.

Consequently, shares are up nearly 28% since mid-March – arguably the coronavirus’ first peak in the US.

As a result of the strong performance so far this year, Walmart also paid out US$1.1 billion in special bonuses to employees via three tranches, with the third and latest pool of US$428 million to be distributed on 20 August 2020.

Despite the positive fundamental outlook, the stock appears to be slightly undervalued, trading at a trailing price-to-earnings ratio of 25.21 as of 14 August 2020, just under its five-year average of 25.49. This indicates that there is more room for Walmart’s stock value to grow.

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Walmart rated a ‘buy’ by Wall Street analysts

Across the board, the Walmart stock currently has a consensus rating of ‘buy’ from 39 Wall Street brokers, based on Bloomberg data.

The stock has also received an average 12-month share price target of S$139.49 per share, according to the same poll.

This indicates a potential upside of 5.2% for the convenience store chain’s stock, based on the last traded price of US$132.84 recorded on Friday 14 August.

In the last two weeks, two investment firms – namely DA Davidson and UBS Group have rated Walmart shares a ‘buy’ alongside price targets of US$148 and US$135 respectively.

DA Davidson’s higher price expectations is predicated on the fact that the retailer is well-positioned to take advantage of the demand of food and home products, which form roughly 56% of all its sales.

The analysts added that Walmart's strategy of investing in its business has also resulted in better savings for consumers that translated to market share gains for Walmart.

Meanwhile, UBS Group reiterated a more moderate price target of US$135, citing that Walmart has likely ‘put together a solid set of results against a Covid-impacted backdrop in 2Q’, with the company noting in its first quarter earnings call that ‘May got off to a solid start’.

Walmart beat earnings estimates for five straight quarters

Analysts polled by Bloomberg have given a consensus unadjusted (GAAP) earnings per share (EPS) estimate of US$1.246 per share against expected revenues of US$135.6 billion for Walmart’s Q2.

In terms of official estimates, Walmart has decided to withdraw financial guidance for the rest of 2020, given the ‘significant uncertainty around several key variables and their potential impact’ on the business, it stated in its Q1 report.

Despite the lack of a forecast, chief financial officer Brett Biggs commented that the company’s ‘business fundamentals are strong’, while its financial position is ‘excellent’. ‘While the short-term environment will be challenging, we’re positioned well for long-term success in an increasingly omni world’, he added.

For existing shareholders, it is probably also worth noting that the company’s actual EPS has surpassed consensus projections for five straight reporting quarters.

On the other hand, reported revenue surpassed Wall Street estimates in Q1 of fiscal 2021 as well as Q2 of fiscal 2020 by 1.54% and 0.28%, but missed targets in Q3 and Q4 of fiscal 2020 by 0.6% and 0.45% respectively.

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