Walmart (NYSE: WMT), the world’s largest retailer by revenue, is a more affordable option for consumers, particularly during times of high inflation. Even during the 2008 financial crisis, WMT stock increased by as much as 13% from its approximate pre-crisis level of $33 in October 2007 to levels of around $38 in March 2009. This marked an exception as the S&P fell by as much as 51% during the same period. WMT stock further rose by 10% between March 2009 and January 2010. In comparison, the S&P rose by about 48% over the same period. Walmart’s wide offering and focus on cost-conscious shopping helps it thrive when times are tough, and investors are seeing those dynamics again in 2022. The company’s stock has remained largely flat at around $148 in the last six months compared to a 16% decline in the S&P stock index during the same period.
In FY 2022 (year ended Jan’22), Walmart’s revenue grew 2.4% year-over-year (y-o-y) to $572 billion, its U.S. comparable-store sales rose 6.4% y-o-y, and adjusted earnings came in at $4.87, up 3% y-o-y. Going forward, the retailer is projecting mid-single digits growth in earnings and slightly expanding margins in 2023, despite warnings of weaker earnings from many of its peers. Additionally, the company expects sales to grow at roughly 3% after two straight years of gains. 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 in Sept 2020, providing subscribers with faster delivery, discounts, and a quicker checkout process at the stores. Walmart is doing reasonably well, considering its size and purchasing power. The company is showing plenty of opportunities to keep expanding in the future and 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 $157 per share, around 6% above the current market price based on two key opportunities.
The first opportunity we see is Walmart’s Revenue growth. While Walmart’s growth slowed compared to a 7% top-line expansion in fiscal 2022, it stayed in positive territory at 2%. The retailer achieved that growth with a balance between rising spending and higher customer traffic. Each visit to Walmart resulted in 2% more spending and 3% more traffic. The e-commerce business did $73 billion in sales for fiscal 2022, an increase of 11% over the previous fiscal year, and up 90% compared to FY 2020. Walmart also generated $11.1 billion in free cash flow and was able to easily pay out the $6.2 billion in dividends in FY’22. Despite Walmart reporting supply-chain costs $400 million higher than expected in the U.S. in the most recent quarter ended Jan 31, its total operating costs grew by less than half a percent y-o-y, even as sales increased by 0.5%. This shows how skilled Walmart is as a merchandiser, as it keeps costs under control even under soaring global inflation.
The second key opportunity stems from Walmart’s Valuation multiple compared to its peers. The stock now trades at 23x its projected FY 2023 earnings per share of about $6.80, per Trefis estimates. This is lower when compared to its peer, Costco, trading at double the multiple of Walmart – at 46x forward earnings. We believe that Walmart’s multiple could grow further, given the revenue and earnings per share growth it has posted over the past years, and a trend that is expected to continue going forward. Over the next two years, Walmart’s EPS is expected to grow 22%, compared to a 13% growth expected for Costco. While we acknowledge that Walmart’s revenue base of around $573 billion (in FY 2022) is much higher compared to around $196 billion for Costco (fiscal 2021 ended Aug), still the growth Walmart has posted is meaningful.
In light of rising interest rates and the threat of recession, the market at the moment is uncertain, but Walmart (relative to the market) is built to maintain its performance in periods like this. Our price estimate of $157 for Walmart stems from a 23.2x P/E multiple and $6.80 in earnings per share in FY 2023. This implies around a 6% premium to the current market price near $148.
It is helpful to see how its peers stack up. WMT Peers shows how Walmart’s stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.
|S&P 500 Return||-5%||-17%||76%|
|Trefis Multi-Strategy Portfolio||-9%||-25%||196%|
 Month-to-date and year-to-date as of 5/12/2022
 Cumulative total returns since the end of 2016
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