Looking at the stock price of Walmart (NYSE:WMT), it seems investors have found new love for the world’s largest retailer.
Trading at $109.15 at yesterday's close, its shares have gained 8% during the past month, adding to their 18% rally so far this year. That powerful momentum pushed the stock to a record high on June 14, despite fears that the U.S.-China tit-for-tat tariffs could escalate retailers' costs and hurt sales.
When we recommended buying Walmart stock last December, the fear among investors was that the big-box retailer didn’t have enough muscle to compete with Amazon.com (NASDAQ:AMZN), which was fast encroaching on its territory and threatening long-term growth.
But Walmart has proven consistently that it has a plan to succeed in this crucial battle. In fact, its massive brick-and-mortar operations are its winning assets in this game. And the company’s latest earnings report on May 16 showed how the retailer was playing to its strengths.
The comparable sales at its U.S. operations in the first quarter were the strongest in nine years, while its online sales rose 37% from a year ago, its eighth straight quarter of growth in e-commerce.
Walmart’s Winning Combination
Over many past quarters, Walmart has proved that its huge brick-and-mortar presence gives it an advantage that no other online competitor can match. Walmart has started to offer free, nationwide one-day shipping on thousands of household goods. It expects to be able to reach 40% of U.S. households with grocery delivery by the end of this year.
The company is quickly expanding its click-and-collect services. The service is currently in 2,450 U.S. stores after adding about 1,000 grocery pickup locations only last year. That’s a serious challenge to Amazon.com, which offers pickup from Whole Foods in 22 cities.
According to investment bank UBS, the grocery category is expected to be among the fastest growing segments of online retail in the next few years, making up about 40% of all e-commerce sales by 2022. And Walmart with its physical and online presence is in a great position to take advantage of this growth.
Other than its traditional strength in retail, Walmart is also pursuing other growth opportunities to diversify its revenue base. For example, it's building a digital-advertising business that uses data from both store purchases and visits to its website to help brands target a certain audience.
The recent rush to safer stocks such as utilities and consumer staples is also making Walmart stock more attractive. Investors are favoring consumer-staples over high-growth stocks as the possibility of an economic slowdown increases. Discount retailers such as Walmart, that sell essential household items, hold up better in a weakening economic environment.
Bottom Line
To some investors, Walmart stock has become expensive at its forward price-to-earnings multiple of around 22x after the impressive rally of the past six months. That concern, in our view, ignores the fact the retailer isn’t the same company it was five years ago.
With its e-commerce momentum and strong core brick-and-mortar operations, we believe its shares have more room to run, especially as the macro headwinds are gathering pace, and it has a rock-solid dividend program to help it ride through the market slump.