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Walmart Stock: Is a Pullback around the Corner?

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Jun. 25 2019, Updated 2:24 p.m. ET

Walmart stock looks unattractive on valuation

While we are impressed with the continued strength in Walmart’s base business, the retailer’s high valuation combined with low earnings growth expectations and tough comparisons makes us skeptical.

We expect Walmart (WMT) to continue to drive comparable sales on the back of higher traffic and ticket size. The expansion of digital fulfillment options, a focus on merchandise, and value pricing are expected to support its comparable sales. However, tough comparisons and heightened competition are likely to remain a drag.

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Meanwhile, Walmart’s adjusted EPS are expected to stay weak in the near term, reflecting pressure on margins and dilution from Flipkart. Analysts expect its bottom line to return to the growth trajectory in the second half of fiscal 2020. We expect Walmart to continue to beat Wall Street’s estimates. However, the earnings growth rate is likely to stay low.

Walmart stock trades at 23.0 times its fiscal 2020 estimated EPS of $4.83, and 22.0 times its fiscal 2021 estimated EPS of $5.05, both of which look expensive based on the projected EPS decline of 1.6% in fiscal 2020 and ~4.6% EPS growth in fiscal 2021. Given Walmart’s high valuation, a pullback in its stock could be an opportunity to become constructive.

Peer comparison

Walmart stock trades at a significant premium to Target (TGT) stock. Meanwhile, it’s trading at a lower valuation multiple when compared to Costco (COST). Target and Costco stock are trading at a forward PE multiple of 14.5x and 32.0x, respectively.

We expect Target to post better sales and earnings growth when compared to Walmart. Meanwhile, Costco’s sales and earnings growth look impressive. However, its high valuation is a concern.

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