Walmart (WMT) Added to Goldman's Conviction Buy List, Target (TGT) Removed

October 19, 2021 6:48 AM EDT
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Price: $146.63 +0.06%

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    34 Buy, 14 Hold, 4 Sell

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Goldman Sachs analyst Kate McShane has added the Buy-rated Walmart (NYSE: WMT) to the bank's 'Americas Conviction Buy List' while removing the Buy-rated Target (NYSE: TGT) from the same list.

Walmart is added as the company has improved its ability to “grow EBIT dollars along with continued investments, which we think will gain investor attention as the company executes over the coming year,” McShane said in a client note.

The analyst also takes note of the recent stock underperformance which yields an attractive entry point given that McShane expects WMT to take share and do it more profitably into 2022.

“After several years of investment (largely in ecommerce and its supply chain) weighing on profitability, we think WMT is now in a position to grow EBIT dollars along with continued investments due to the greater scale of its ecommerce business today, improving mix, and growth from higher margin ancillary businesses like advertising (Walmart Connect)...Compared to consensus, we are assuming higher gross margins as mix continues to improve, largely related to growth in ecommerce and third party. Ultimately, the higher profitability overall is translating to sustained elevated cash balances in our model, which could support ongoing business investments (we think mostly targeting tech and the supply chain) as well as incremental buybacks.”

McShane said she expects to see “continued US grocery market share gains” for the company on the back of the additional traffic improvement and more persistent inflation. A new price target on WMT is $196.00 per share from the prior $184.00.

“The stock currently trades at an 11% discount to its 5-year relative P/E average despite the company’s improving financial algorithm, and compares to the broadlines peer group which are all inline to better on the same metric. We think the stock has sold off recently mainly due to concerns around the lower end consumer given rising gas prices as well as supply chain issues impacting companies with less pricing power. WMT already has historically wide price gaps, so there is room to raise prices where needed, but more importantly, we think its value proposition should become more compelling for customers driving traffic and market share gains, although we recognize gas prices hold a somewhat inverse relationship to WMT SSS historically. Additionally, we highlight WMT’s customer base includes ~90% of the US population, in addition to its international footprint,” McShane added.

Target is removed from the Conviction List as the stock is up +140% since being added to the list on March 3, 2020, while the S&P gained 49% over the same time frame.

“TGT has gained share across all categories over the past 18 months supporting double digit top line growth (vs LSD in prior three years) and outsized operating income growth, and we think the pace of revenue growth should slow into 2022 to be in-line with historical levels.”

The analyst remained Buy-rated on TGT with the price target going to $308.00 from the prior $281.00 due to higher estimates.

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