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3 Reasons This Value Stock Looks Like a Steal Right Now

By Jeremy Bowman - May 24, 2021 at 6:06AM

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Post-earnings, this retailer looks like one of the biggest bargains on the market.

Value stocks are back with a vengeance this year.

After growth stocks dominated 2020, that pattern has suddenly reversed. The Vanguard Value ETF has gained 17% year to date compared to just a 3% increase in the Vanguard Growth ETF.  

With the economy rapidly normalizing and fears about inflation and rising interest rates now dominating financial media, investors are ditching high-priced growth stocks and shifting back to value stocks, and one company that looks like a winner after a bulletproof earnings report is Walmart (WMT 0.81%). Let's take a look at a few reasons why.

Scales with two stacks of coins on them.

Image source: Getty Images.

1. It just smashed quarterly expectations

Walmart was a big winner during the pandemic as its e-commerce sales surged and it benefited from a shift in food spending from restaurants to supermarkets. As the company was lapping the start of the pandemic in the first-quarter report, analysts had only modest expectations, calling for just a 0.9% increase in Walmart's U.S. comparable sales. Instead, the retail giant posted comparable sales of 6%, or a two-year comp of 16% after last year's 10% increase. Sam's Club was even stronger, with comparable sales up 7.2%. 

The company benefited from stimulus checks and also a shift in shopping patterns back to general merchandise as well as having businesses like auto and vision centers reopening after lockdowns. Though comparable sales in grocery, its biggest business, fell as it lapped the stocking-up patterns ahead of lockdowns last year, it still gained market share in the key category. 

Overall revenue, which was impacted by divestitures in its international business, increased 3.7% to $138.3 billion, ahead of $132 billion, and on the bottom line it posted adjusted earnings per share of $1.69, up from $1.18 a year ago and smashing the consensus at $1.21.

Walmart executed across the board in the quarter, and the company raised its guidance for the current quarter and the full year.

2. Profitability is improving

Walmart's sales surged in 2020, but profit growth wasn't as strong as some might have expected. That wasn't the case this time around. 

Adjusted earnings per share rose from $1.18 to $1.69 as the company saw a sharp improvement in gross margin, and was boosted by the divestiture of its weaker international businesses in the U.K., Argentina, and Japan. The retailer benefited from sales mix shifts to higher-margin general merchandise, the rolling off of $400 million of COVID-related expenses, and the reopening of the auto and vision centers. Across the business, gross margin increased 104 basis points, and at Walmart U.S. it rose 142 basis points.

Meanwhile, the margin profile at its international businesses improved significantly thanks in part to the divestitures. Operating income from its international segment jumped 48% to $1.2 billion.

Going forward, management acknowledged uncertainty in the second half of the year, but the company should continue to benefit from lower COVID-related expenses, the international divestitures, and the shift in sales mix away from groceries to higher-margin products.

A Walmart truck on the highway

Image source: Walmart.

3. There's a still a number of growth levers to pull

While Walmart's brick-and-mortar business remains rock solid, the company is increasingly thinking like a tech company. Its e-commerce business is growing fast, now No. 2 in e-commerce sales in the U.S. behind Amazon. The company is also borrowing a number of strategies from its chief rival in e-commerce, including investing in its marketplace, expanding its advertising business, and offering fulfillment services to third-party sellers.

All of those businesses have the potential to generate high margin for Walmart. On the earnings call, management noted that new advertisers more than doubled from a year ago, and management expressed confidence that the growth of marketplace, fulfillment, and advertising can lift profit margin for the company as a whole. 

Additionally, Walmart has a lot of growth opportunities in India, thanks to Flipkart and PhonePe, the businesses it gained majority control of in a 2018 acquisition. Walmart noted that total payment volume at PhonePe jumped 150% in the quarter.

As the world's biggest retailer, Walmart has a number of competitive advantages, including economies of scale, a well-known brand, and a reputation for everyday low prices. While the core business may be mature, Walmart still has appealing growth opportunities in e-commerce and emerging markets like India, and the company is shifting resources to focus on those areas, which should help accelerate its growth.

Despite the blowout report on Tuesday, shares gained just 2%. Walmart now trades at a price-to-earnings ratio of less than 24, which seems like a steal in today's frothy market, especially for a retail stock that's been an industry leader for over a generation and is bringing a ton of momentum into the rest of the year.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeremy Bowman owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon, Vanguard Growth ETF, and Vanguard Value ETF. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
WMT
$127.61 (0.81%) $1.03
Amazon.com, Inc. Stock Quote
Amazon.com, Inc.
AMZN
$139.41 (-0.99%) $-1.39
Vanguard Index Funds - Vanguard Growth ETF Stock Quote
Vanguard Index Funds - Vanguard Growth ETF
VUG
$256.30 (-0.21%) $0.55
Vanguard Index Funds - Vanguard Value ETF Stock Quote
Vanguard Index Funds - Vanguard Value ETF
VTV
$137.66 (0.12%) $0.16

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