10 Oct

Target and Walmart: Is It Time to Exit the Stock?

WRITTEN BY Amit Singh
  • Target and Walmart shares are trading at record highs.
  • The uptrend in Target and Walmart stock is positive.

So far, Target (TGT) and Walmart (WMT) stocks have recorded stellar gains this year. The shares are trading at record highs. Target stock has outperformed the broader markets and its peers by a wide margin. Notably, Target stock has gained more than four times the S&P 500 this year, which is phenomenal.

Target stock has increased 67% on a YTD (year-to-date) basis as of Wednesday. The stock is about 1% lower than its 52-week high of $111.24. During the same period, the S&P 500 rose 16.5%. Walmart stock has risen 27.7% YTD. The stock is trading 0.8% below its 52-week high of $119.86

The stellar growth in Target and Walmart’s stock prices stemmed from their strong comparable sales growth. Both of the companies posted impressive comps growth in the past few quarters. The digital transformation supported their growth.

Given the stellar gains in both of these stocks, expected growth moderation, and expanded valuation, it might be the right time to book profits.

Recent Consumer Confidence Index data from The Conference Board wasn’t encouraging. The Consumer Confidence Index fell by 9.1 points to 125.1 in September. Wells Fargo isn’t optimistic about holiday sales. To learn more, read Wells Fargo Says to Brace for Weak Holiday Retail Sales. While the reports sound somewhat bearish, holiday sales projections state otherwise.

We expect Target and Walmart to sustain the momentum during the holiday season. However, the upside in both of the stocks could be limited.

What’s in the offing for Target stock?

As we noted earlier, Target stock has generated phenomenal returns this year. The strong run was due to the company’s exceptional comps growth. Target’s margins got better during the last reported quarter. The company’s gross margins expanded by 30 basis points, while its operating margin grew by 80 basis points. Target’s bottom line increased at a double-digit rate in the last six quarters, which also supported its stock.

We think that Target’s expanded same-day delivery services, store remodeling, and exclusive brand launches could continue to drive its comps. However, the comps growth rate will likely moderate. The following graph shows that Target’s comps growth rate softened sequentially in the first two quarters of fiscal 2019.

The retailer faces tough YoY comparisons in the second half of 2019. Target’s comps rose 5.1% and 5.3% in the third and fourth quarter of fiscal 2018. As for the second half of 2019, the company expects its comps to increase 3.4%.

While we expect the company’s margins to improve, its EPS growth will likely slow down. Analysts expect Target’s bottom line to increase by about 8% in the third quarter, which indicates a sharp sequential deceleration in the growth rate.

Target’s digital expansion, value pricing, and expanded offerings will likely support its stock. However, the surge in the stock and moderating growth rate could limit more upside.

What’s on the horizon for Walmart?

Walmart shares have risen 27.7% since the beginning of the year. The stock rose due to the company’s stellar performance in the domestic market. The company’s comps in Mexico were impressive. Walmart’s digital transformation contributes to its comps growth and stock.

Notably, Walmart’s comps in the US have increased in the last 20 quarters due to continued traffic growth. On average, the company’s comps rose 3.7% in the past five quarters. During the last reported quarter, Walmart’s management stated that its US comps increased 7.3% on a two-year stacked basis—its best growth in a decade. In Mexico, the company’s comps increased 4.8% during the last reported quarter. The company’s management stated that Mexico’s comps growth outperformed the markets in the previous 18 quarters.

We think that Walmart’s expanded grocery pickup services will continue to drive its comps. Expanded same-day grocery delivery services and new brands on Walmart’s website could continue to drive traffic in the domestic market. Price investments and omnichannel offerings should support the company’s growth.

While Walmart’s top line will likely be impressive, its EPS growth could stay low. Analysts expect Walmart’s bottom line to increase at a low-single-digit rate in the second half of the current fiscal year. The EPS growth rate will likely improve in fiscal 2021. However, Walmart’s EPS growth rate will likely lag its peers.

We think that Walmart’s digital initiatives, lower pricing, and expanded offerings will support its traffic growth during the holiday season. However, the surge is Walmart’s stock price and an average EPS growth projection could limit more upside in the stock.

Analysts’ ratings and valuation

Wall Street analysts’ consensus target price on Walmart and Target indicates minimal upside. Analysts have a consensus target price of $111.71 for Target implies an upside of 1.2% based on its closing price of $110.36 on Wednesday. Despite the slight upside, most analysts continue to recommend a “buy” on Target stock. Among the 27 analysts, 16 recommend a “buy” on Target stock, while 11 analysts recommend a “hold.”

Target stock trades at a discount to Walmart and Costco stock. The stock trades at a forward PE ratio of 17.4x, which is well below Walmart and Costco. Walmart and Costco trade at forward PE ratios of 23.9x and 34.0x, respectively.

For Walmart, among the 32 analysts, 19 recommend a “buy,” 12 recommend a “hold,” and one recommends a “sell.” Analysts’ target price of $120.02 implies an upside of about 1% based on Walmart’s closing price of $118.93 on Wednesday.

Latest articles

Is the technology sector due for a correction? Twitter (TWTR) and Intel Corporation (INTC) will release their Q3 2019 stock earnings on October 24.

The Dow Jones Industrial Index (or DJIA) is trading just 2.2% below its all-time high. But is the stock bubble about to burst?

Renaissance Technologies had a strong investment in the healthcare sector in Q2 2019. The healthcare sector makes up 18.16% of the firm's total portfolio.

This week, semiconductor equipment suppliers Teradyne Inc. (TER) and Lam Research (LRCX) will report their quarterly earnings.

Major chip companies Texas Instruments (TXN) and Xilinx (XLNX) released their earnings last week and saw their stocks fall.

On October 18, CNBC reported Bill Gross top picks. His top stock picks were Annaly Capital (NLY), Invesco (IVZ) and Allergan (AGN).