Walmart (NYSE:WMT) knows how to wow the markets. It told the world and analysts during its February 18 earnings release that it expects “low single digits” in sales growth. Meaning 1% or 2%. As a result, don’t expect WMT stock to take off this year like a thunderbolt.
Moreover, Walmart’s earnings release indicated that 2021 operating earnings would be down next year, but “flat to up slightly, excluding divestitures.” In addition, earnings per share are projected to be the same.
Valuing Walmart Stock
These results are nothing to write home about. The market wants to see growth. Otherwise, why is the company public? As it stands, WMT stock trades for 23.5 times its forecast January 2022 earnings. This seems too high for such a low growth company.
For example, Walmart’s U.S. sales were up just 8.6%. But Target (NYSE:TGT) had comparable sales of growth of 20.5% in 2020. Target has not provided any guidance for its 2021 earnings. However, based on earnings forecasts by analysts surveyed by Refinitiv at Yahoo! Finance for TGT stock, it trades at 20.7 times this year’s earnings.
In other words, Walmart is trading at 23.5 times earnings but TGT stock, with higher earnings last year, is at just 20.5 times. I suspect that means WMT stock is overvalued. It should be at 20 times earnings, if not lower.
For example, even if WMT was at 20 times forecast EPS of $5.48 this year, WMT stock would trade at $109.60 per share. That represents a drop of 14.9% from the March 9 price of $128.89. At 18 times earnings, WMT stock would trade at $98.64, or 23% below today’s price.
However, I am completely out-of-step with the wide world of analysts covering WMT stock. For example, TipRanks.com indicates that 22 analysts who have covered the company in the past 3 months think it is worth $162.89 on average. That represents a potential gain of 26% from here.
Moreover, Marketbeat.com says that no less than 37 analysts have a consensus estimate of $149.51, or 16% higher than today.
Of course, these are the same analysts that failed to foresee WMT stock falling from its peak of $153 in late January. At current prices, that represents a drop of 15.7%.
I suspect they will have to revise their forecasts. That could happen if WMT stock keeps falling if sales and earnings end up staying flat to slightly higher — just as the company (sort of) predicts.
What To Do With WMT Stock
Here is the best one analyst could say about Walmart after the earnings release, according to Reuters:
“‘Guidance was muted, locking in gains from last year but stalling profit expansion in favor of critical investments in people and platform,’ Jefferies analyst Stephanie Wissink said.“
The guidance was muted, quite the ringing endorsement for WMT stock. Pardon my sarcasm, but I just can’t see why analysts are coming out with such high stock price targets. Do they actually think that Walmart deserves to have an even higher price-to-earnings (P/E) ratio than 23.5 times now?
That is the only logical conclusion I can come up with when forecast EPS is going to be flat but price targets are higher. In other words, the “P” portion of the P/E multiple is expected to be higher with the “E” portion of the ratio staying flat. There really seems to be no basis for this higher P/E ratio at all.
The only other conclusion I can reach is that these analysts don’t believe Walmart’s own forecasts. They seem to believe that Walmart is too conservative and that earnings will be higher than forecast.
But again, there is no basis for this. This is why I feel that investors should maybe be more cautious with WMT stock than they might otherwise be. This is possibly from the influence that the swath of exuberant analysts on Walmart might lead them to believe about the company. In other words, the cautious investor might think it best to hold off on Walmart right now.
On the date of publication, Mark R. Hake did not hold a long or short position in any of the securities in this article.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.