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How Analysts View Wal-Mart After Earnings

Chris Lange

Wal-Mart Stores Inc. (WMT) reported its fourth-quarter and fiscal 2017 results early on Tuesday. The discount giant saw its shares make a handy gain that day and close out the week up about 4.5%. Analysts took this as an opportunity to hike their targets on the stock, but one report out of the group stood out from the rest, calling almost a street-high target. Some might even call it a “Screaming Buy” at a time when the broad markets are screaming higher.

24/7 Wall St. has included some of the highlights from the earnings report, as well as what some analysts are saying afterward.

For the quarter, Wal-Mart posted $1.30 in earnings per share (EPS) on revenues of $130.9 billion, including membership fees in Sam’s Club. The consensus estimates from Thomson Reuters had called for EPS of $1.29 and $131.22 billion in revenue. In the same period of last year, the company posted EPS of $1.49 on revenues of $129.67 billion.

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U.S. fourth-quarter same-store sales rose 1.8% at the company’s supercenter and discount stores. Same-store sales in the company’s Sam’s Club stores were up 2.4% excluding fuel and up 3.1% including fuel sales. Total U.S. net sales, including fuel, rose 2% for the quarter.

Wal-Mart guided fiscal year 2018 EPS in a range of $4.20 to $4.40 and first-quarter EPS at $0.90 to $1.00. Consensus estimates call for first-quarter EPS of $0.96 and revenues of $117.81 billion. For the 2018 fiscal year, analysts are looking for EPS of $4.33 and sales of $494.68 billion.

Before we get to the report in question, a few other analysts weighed in on Wal-Mart:

  • Goldman Sachs has a Neutral rating with a $74 price target.
  • RBC Capital Markets has an Underperform rating with a $67 price target.
  • Cowen reiterated an Outperform rating.
  • Stifel has a Hold rating with a $72 price target.
  • Wells Fargo has a Hold rating.
  • Bernstein has a Neutral rating and a $75 price target.

Merrill Lynch stood out from this group when it raised Wal-Mart to a Buy rating from Neutral, and the price objective was raised to $88 from $76. This new price target is just $2.00 shy of the highest price target in the Thomson Reuters universe. The consensus price target is now $74.87, but that target has been somewhat flat for about four months now.

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The firm believes that the U.S. comp and e-commerce sales momentum should continue in fiscal 2018, and also that Wal-Mart is entering a period of sustained 20% to 30% or so e-commerce growth driven by acquisitions, marketplace and grocery pickup.

Merrill Lynch expects this period of incredible growth to be driven by the following:

  • Acquisitions (Jet/Hayneedle, Shoebuy and Moosejaw so far) that provide access to more upscale customers and new technologies
  • Marketplace expansion (now over 35 million items from 8 million in January 16)
  • Free two-day shipping on purchases of $35 or more for over 2 million items (previously required a $50 membership)
  • Expansion of online grocery pickup to roughly 1,200 stores in fiscal 2018 from 600 currently

The firm went on to detail in its report:

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We believe Walmart’s P/E multiple should continue to rise towards our 19-20x target over the next 12 months as e-com success increases and Walmart’s recent e-com acquisitions go into the US comp (e-com is already providing a 40 basis point US comp contribution and does not include Jet.com). Our $88 price objective is also supported by our discounted cash flow analysis (assumes a 7-8% equity cost of capital and 7.5x terminal EBITDA multiple). We also believe that Walmart could perform relatively well under certain Border Adjustment Tax scenarios given that Walmart’s low cost leadership could support market share gains as consumers become more value conscious in an inflationary environment. However, continued increases in retail gas prices are a key risk to our Buy rating given the historical inverse relationship with Walmart US comps.

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Shares of Wal-Mart closed Friday at $72.39, with a consensus analyst price target of $74.87 and a 52-week trading range of $62.72 to $75.19.

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