Walmart (NYSE: WMT), the world’s largest retailer, has gained roughly 20% – increasing from about $119 at the beginning of 2020 to around $143 currently. Walmart booked an amazing fiscal year 2021 (year ended Jan 2021) that saw incremental year-over-year (y-o-y) revenues of $40 billion and 11% growth in adjusted earnings per share. Its free cash flow surged 77% to almost $26 billion, of which $8.7 billion was spent on buybacks and dividends. The company also raised its outlook for the current fiscal year following strong Q1 results, driven by improving store traffic, continued booming digital demand, and rising market share in the grocery business. The retailer has made a conscious effort to focus on its integrated retail strategy, which seamlessly connects online and offline channels, making its stores more efficient. This includes launching the Walmart+ subscription service, providing subscribers with faster delivery, discounts, and a quicker checkout process at the stores. That said, the company is showing plenty of opportunities to keep expanding going forward. We discuss more in the sections below.
But is this all there is to the story?
No, not quite. Despite the company’s stock rally, Trefis estimates Walmart’s Valuation at about $153 per share, around 7% above the current market price based on two key opportunities.
The first opportunity we see is Walmart’s Revenue growth. Fiscal 2021 was no doubt a stellar year for Walmart’s top-line expansion (7% y-o-y growth) as millions of consumers were busy packing their pantries during the initial phase of economic lockdowns around the world. It should be noted that the retailer’s comparable-store sales rose 8.6% at Walmart U.S., with 79% growth coming from e-commerce in FY 2021. While sales gains slowed (+3% y-o-y) as comparable-store sales growth hit 6% (with 37% e-commerce growth) in Q1 2022 compared to the 9% increase Walmart enjoyed through FY 2021, still comps growth was up 16% over the past two years. Looking ahead, Walmart modestly raised its outlook for the second quarter and for the wider fiscal year on both sales and operating income. Although it still expects a slight dip against a tough y-o-y comparison. The retailer expects continued pent-up demand benefits throughout fiscal 2022. In fact, it still plans to spend over $14 billion on the business this year, in order to build a stronger infrastructure to support its elevated sales volumes, particularly in the online business.
The second key opportunity stems from Walmart’s valuation multiple compared to its peers. The stock now trades at a premium of 26x its projected FY 2022 earnings per share of about $5.98, per Trefis estimates. This is higher when compared to its peer, Target, trading at 21x forward earnings. However, we believe that Walmart deserves this premium in multiple, given the strong earnings per share growth it has posted over the past years, and a trend that is expected to continue going forward. Walmart’s EPS grew a strong 45% between FY 2019 and FY 2021, and Target’s EPS grew 32% during the same period. Over the next two years, Walmart’s EPS is expected to grow 15%, compared to a 14% growth expected for Target. While we acknowledge that Walmart’s revenue base of around $560 billion (in FY 2021) is much higher compared to around $94 billion for Target, still the growth Walmart has posted is meaningful.
Walmart’s special bonuses to hourly employees, higher wages in fulfillment centers, and an exponential increase in digital sales during the pandemic are expected to elevate costs over the next few years. These initiatives might pressure earnings and reduce direct shareholder returns like stock buybacks. However, it will ensure that the company continues to dominate the multiline retail industry as it has been doing before the pandemic, as well.
Our price estimate of $153 for Walmart stems from a 25.6x P/E multiple and $5.98 in earnings per share in FY 2022. This implies around a 7% premium to the current market price near $142.
It is helpful to see how its peers stack up. Check out WMT Stock Comparison With Peers to see how Walmart compares against peers on metrics that matter.