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Why Walmart Stock Needs a Big Earnings Beat

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Stock performance 

Walmart (WMT) stock is up 6.1% on a YTD (year-to-date) basis as of April 5 thanks to the company’s better-than-expected earnings in the past four quarters and the sustained momentum in its comps. However, Walmart stock has lagged its peers Target (TGT) and Costco (COST) in terms of growth. Target and Costco are up 22.5% and 20.7%, respectively.

Walmart is likely to sustain momentum in its comps in the coming quarters. However, the pressure on its earnings is limiting the upside in its stock.

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Walmart’s bottom line is expected to fall in fiscal 2020, reflecting an adverse mix, higher transportation costs, and dilution from its Flipkart acquisition. Excluding the Flipkart deal, Walmart’s bottom line is expected to mark low- to mid-single-digit growth.

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What could boost Walmart stock?

Walmart needs a big earnings beat to drive its stock higher. It has surpassed analysts’ earnings estimates in the past four quarters despite pressure on its margins. However, in the absence of any significant boost from a lower effective tax rate in fiscal 2020, a big earnings beat seems like it’ll be hard to come by. An unfavorable mix driven by rising e-commerce sales is further restricting the company’s EPS growth rate.

Even excluding the Flipkart deal, Walmart’s earnings growth projection looks unappealing, as the stock is trading at a forward PE multiple of 20.8x. In comparison, Target stock is trading at a much lower forward PE ratio of 13.9x, and it has a better EPS growth rate.

Shares of Costco are trading at a forward PE multiple of 30.3x, well above both Target’s and Walmart’s. Costco has always traded at a premium valuation to its peers and has reported industry-leading sales and earnings growth for the past several quarters.

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