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Wednesday, January 23, 2019

Walmart upgraded at Morgan Stanley amid 'unprecedented' cost control

Walmart remains one of just a few good stocks among the nation's largest retailers despite a forecast for declining earnings per share in 2019, according to Morgan Stanley.

Analyst Simeon Gutman upgraded shares to an overweight rating from equal weight on Wednesday and told clients to expect it to outperform its peers over the next few years.

"At face value, Walmart doesn't fit neatly into the framework we are recommending in 2019 as we model EPS declining in the low single digit range and its about 20x P/E multiple is above historical levels," Gutman wrote. "However this is misleading, as both the EPS decline and inflated multiple are attributable to Walmart's acquisition of Flipkart in 2018."

"In contrast, we believe Walmart U.S. (the main driver of the stock) will be one of few retailers to grow earnings in 2019," he added. Gutman sees Walmart EPS at $4.80 in 2019 and at $4.74 in 2020.

The analyst also raised his 12-month price target on shares of Walmart to $110 from $107, representing more than 12 percent upside from Tuesday's close. Gutman is also more bullish on Walmart thanks to what he categorized as "an unprecedented commitment to cost control," which should help the company offer customers the lowest prices.

Still, Walmart's stock has performed nearly the same as the broader market over the past 12 months, down nearly 8 percent versus the S&P 500's 7.2 percent slump. Some of that underperformance came after the U.S. retail giant bought India's largest online retailer, Flipkart, in May 2018.

Though Walmart hopes the purchase will help it develop stronger technical expertise in e-commerce and allow it to take advantage of the fledgling Indian market, some investors were unconvinced. The stock tumbled more than 4 percent after news of the deal broke amid concerns that, barring India, Flipkart was struggling against Amazon's dominance and faced serious hurdles to turning a profit.

Over the last six months, however, Walmart is up more than 11 percent and is priced above its historical price-to-earnings ratio. While some investors may be put off by the relatively expensive price, Gutman says there is still reason to buy.

"This premium looks reasonable: Walmart deserves to be benchmarked against higher-multiple consumer packaged goods stocks given its improving sales/earnings trajectory and consistency; and its defensive nature limits downside risk," he wrote.

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