Please ensure Javascript is enabled for purposes of website accessibility

Double Buy Ratings for Wal-Mart Stock: What You Need to Know

By Rich Smith - Apr 7, 2017 at 2:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The week ends with a one-two dose of good news for Wal-Mart.

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

Up less than 5% in 12 months, shares of retail giant Wal-Mart Stores (WMT -0.28%) have lagged the rest of the S&P 500 by more than 10 percentage points over the past year. But could happy days be here again?

Two analysts think so. This morning, first tiny Telsey Advisory Group announced it is upgrading shares of Wal-Mart to outperform and raising its price target more than 12% to $82 a share. Shortly after, Jefferies & Co. chimed in with an endorsement of its own, reiterating its buy rating on Wal-Mart stock and doubling down on an $86 price target.

Here are three things you need to know about that.

Frozen food aisle

Image source: Getty Images.

1. The tale Telsey told

Physical retail is a mess. Left and right, we see retail companies filing for bankruptcy (RadioShack, hhgreggg, Payless, and maybe soon Sears as well), or seeking to sell out to avoid it, as Staples is said to be doing. Amazon.com's low prices and ever-quicker delivery options are simply wreaking havoc among the brick-and-mortar crowd. But perversely, that could be good news for companies that manage to survive to pick up the pieces (and the market share) of their fallen rivals.

According to Telsey Advisory Group, as the biggest physical retailer in the world, Wal-Mart Stores is one such likely survivor. StreetInsider.com notes that Telsey believes Wal-Mart is "regaining dominance in the physical retail game" both at its eponymous retail stores and at Sam's Club warehouse stores as well. 

This, says the analyst, should help Wal-Mart to grow its profits slightly this year (from $4.38 to $4.40 per share), and lead to even stronger profits growth in fiscal 2018, when Telsey sees Wal-Mart growing earnings 6.6% to $4.69 per share.

2. Jefferies remains optimistic

At the same time, Jefferies argues that investors should not overlook Wal-Mart's substantial online operations. It notes that Wal-Mart's CEO claims the company enjoys "a multiplier effect" from selling goods online to folks who can pick up their purchases immediately at physical stores, while those same stores give otherwise online shoppers a chance to try on and try out goods, and buy them in person.

Jefferies also believes that Wal-Mart's purchase of Jet.com will improve its online business with "Smart Cart proprietary technology that adjusts prices in real time based on proximity of product to the shopper and shipping costs." Both observations tend to support Telsey's finding that Wal-Mart is enjoying "stronger sales ... in the digital market."

3. The proof is in the pudding

But can any support for all this be found in Wal-Mart's financials? Perhaps -- and perhaps not.

According to data from S&P Global Market Intelligence, even as its rivals are flailing, Wal-Mart's U.S. retail stores have enjoyed a combined 16.5% worth of revenue growth over the past five years, while Sam's Club sales are up 6.7%. Profits, however, are lower at both of these two big Wal-Mart businesses over the same period, with the company earning less money from its retail stores -- and its wholesale stores as well -- last year than it did in 2012.

Last year alone, total operating profits at Wal-Mart dipped more than 5%, even as sales continued to grow.

What it means for investors

This may be the cost of doing business in the U.S. (or even remaining in business) for Wal-Mart. Everywhere you look, one competitor (Amazon.com) continues to gain market share even as it becomes more and more profitable, while others (Staples, for example) struggle and look for a buyout, and still others (Payless most recently, and soon, perhaps, Sears) simply throw in the towel go out of business.

Yes, Wal-Mart survives -- but is simply surviving a good enough reason to own Wal-Mart stock? I'm not so sure it is.

Valued on P/E, Wal-Mart stock currently costs 16.6 times trailing earnings. Even were it earning today what Telsey says it might earn two years from now, the stock's P/E ratio would still be 15.5, which seems a mite expensive for a company growing profits not at all today, maybe a modicum next year, and only 6.6% the year after that.

When you get right down to it, even if Telsey is right about Wal-Mart being a survivor, and even if Jefferies is right, too, the stock still doesn't look cheap enough to buy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$121.58 (-0.28%) $0.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
317%
 
S&P 500 Returns
112%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.