Investors looking for safety, defensiveness, and high quality amid market uncertainty should consider Walmart (WMT) .
Amid the backdrop of a market facing banking stress, tighter credit, and a looming downturn, WMT fits the mold as a recession-resistant retailer with a solid balance sheet. The company also generates a steady cash flow with expanding margins. In an unsteady market and a challenging macro outlook, WMT offers investors both defensive and offensive characteristics.
The post-Covid retail landscape has created a few challenges for the sector, especially inventory overstocking that contributes to markdowns. Most of the markdowns are now behind Walmart. But prolonged inflation could lead to continued cuts in discretionary spending. Nonetheless, Walmart has been well-positioned to benefit from strength in groceries, which could generate market share gains.
With inventory issues mostly behind Walmart, along with fewer Covid-related expenses, labor issues, and supply chain challenges, 2023 sets up as a year with improved margins.
Cowen retail analyst, Oliver Chen, is bullish on WMT with Wall Street high target of $180. In a recent interview, he noted, "Membership models like Walmart+ not only increase the frequency of shopping but unlock other ancillary services that benefit margins, such as advertising revenue and a third-party marketplace. On a long-term basis, we are modeling mid-single digit EPS growth and operating margins in the 4% range."
WMT might not be considered a value stock, with a price-to-earnings of 23 and dividend yield of 1.6%. Yet, the company stock is valued for its consistency, steady growth, cash flow, and a $20 billion buyback announced in November. In the last five years, buybacks have reduced outstanding shares by 10%, and a 20% reduction in the previous ten years.
While WMT is known for its defensiveness, there are catalysts ahead that could push the stock higher. Walmart had momentum headed in 2023 after a solid finish to 2022. Two boutique firms that track Walmart's business are positive about quarter-to-date sales, appearing to be above consensus. Margins also appear strong, with well-managed inventory and fewer clearance markdowns. Sam's Club also has momentum headed into this year; sales grew by over $10 billion in 2022, with 12 consecutive quarters of double-digit comps.
Walmart is hosting an investment meeting on April 4 and 5. Morgan Stanley's retail analyst, Simeon Gutman, likes the risk vs. reward headed into the meeting. He believes earnings visibility is solid and margin guidance is conservative, considering that the quantitative building blocks are in place for margin expansion, including from advertising and Walmart+. His $160 target is based on a sum-of-the-parts framework, with upside possibilities from Flipkart and Sam's Club. Additionally, Morgan Stanley believes stock pressure from selling from the Walton Family Trust should abate.
In a choppy market, Walmart is a supertanker sailing steadily ahead. In a weaker economy, WMT attracts a higher-end shopper, and in a more robust economy its core shopper has more purchasing power for discretionary purchases. While not a cheap stock, it can be confidently owned due to conservative guidance, solid execution, market share gains, and margin expansion potential over the next few years. WMT has traded sideways for over two years; the next big move will likely be toward the high end of the range.
