It’s been a tough year for most brick-and-mortar U.S. retail stocks, but Wal-Mart Stores Inc(WMT) investors don’t mind the difficult environment.
Walmart is up 40 percent year-to-date, more than double the return of the Standard & Poor’s 500 index, and RBC Capital Markets managing director Scot Ciccarelli says the company’s best days are still ahead.
According to Ciccarelli, investors still aren’t fully appreciating just how much money Walmart has pumped into beefing up its online sales in recent years to compete with Amazon.com (AMZN). In the past two years, Walmart has invested roughly $2 billion in e-commerce sales, and the investments certainly appear to be paying off from a revenue standpoint. In the most recent quarter, Walmart reported 50 percent year-over-year growth in online sales.
Ciccarelli says Walmart is still nowhere near the end of its e-commerce investment initiative. When its online sales push is finally complete, he says the company could be positioned for a major earnings boost.
“Many changes/investments should ultimately improve Walmart’s longer-term strategic positioning, and as investors increasingly view it as a consumer staple and a true competitor to Amazon, WMT may continue to re-rate to the upside,” Ciccarelli says.
So far this year, the upside to WMT stock has been driven mostly by earnings multiple expansion. The company has reported 13 consecutive quarters of positive sales growth, but earnings per share are only up 1 to 2 percent in each of the past three quarters.
Despite the lackluster earnings growth, investors have been buying WMT stock hand-over-fist, driving its forward price-earnings earnings ratio from 16 to about 21.
“Yes, [earnings dollars] are still down nearly 20 percent over the last four years, and earnings growth in the near/mid-term will likely be minimal, but much like Amazon, we believe Walmart is playing the long game and is now being rewarded for it by the investment community,” Ciccarelli says.
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