Walmart Inc. (WMT)

Arkansas-headquartered Walmart Inc. (WMT) operates Walmart and Sam’s Club brick-and-mortar retail stores across multiple countries. I am bullish on the stock.

Lately, financial traders have been singing a downbeat tune when it comes to Walmart. Judging by the price action of Walmart stock, you might be tempted to assume that the company is in dire straits, and that American consumers don’t shop there anymore.

Don’t misunderstand – there are challenges that investors shouldn’t ignore. Walmart President and CEO Doug McMillon has a major problem to overcome as his company has to deal with global supply chain issues. Plus, inflation has made it costlier to produce and transport goods, and more difficult for American consumers to buy them.

On the other hand, these are known factors and investors shouldn’t be too shocked if they’re having an impact on Walmart’s financials. Therefore, if Walmart stock gets dumped by the investing community, it can be considered an overreaction and an opportunity to grab some shares at a nice discount.

Sale of the Year

Everybody loves a discount, right? Sure, that’s true until a stock representing a gigantic and famous company drops suddenly. Then, suddenly people run for the hills, when actually they ought to capitalize on the situation.

A prime example of this would be Walmart stock, which closed down 11.38% by market close on Tuesday, May 17. That’s quite a large price move for this particular stock, which is typically known as a low-beta safety stock that grows slowly over time.

Additionally, Walmart stock is known as a dividend stock, as the company pays out a 1.51% annual dividend to reward the loyal shareholders. Along with that, value investors should appreciate Walmart’s trailing 12-month P/E ratio of 27.22, which is quite reasonable.

So, what would possibly cause Walmart to lose a big chunk of its market cap in a single day? Without a doubt, it was the market’s negative response to the company’s first-quarter fiscal-2023 earnings report.

Again, it should be emphasized that the market already knew about Walmart’s challenges, so they shouldn’t have been surprised if the company’s quarterly financials weren’t stellar. McMillon acknowledged the ongoing issues that Walmart is facing, saying, “U.S. inflation levels, particularly in food and fuel, created more pressure on margin mix and operating costs than we expected.”

Should we jump to the conclusion that because of elevated inflation levels, folks have stopped shopping at Walmart stores? Not at all, as Walmart’s comparable U.S. store sales (excluding fuel) increased 3% year-over-year. Moreover, Sam’s Club’s comparable U.S. store sales (excluding fuel) grew 10.2% year-over-year, indicating that when prices get high, shoppers flock to discount stores like Sam’s Club.

Realistic Expectations

Sometimes, investors can be hard to please. They want not just expectation-beating revenue and earnings, but also highly optimistic forward guidance. Anything less simply won’t do.

In first-quarter fiscal 2023, Walmart generated a whopping $141.6 billion in revenue, reminding us all that the company is truly an American retail giant. On a year-over-year basis, this revenue result represents a 2.4% improvement – not too bad at all.

Besides, analysts had expected Walmart to generate $138.8 billion in quarterly revenue. In other words, the company’s actual result isn’t anything to complain about.

Here’s what might have disappointed investors. As it turned out, Walmart reported $1.30 per share of adjusted earnings for the quarter. Apparently, analysts were anticipating that Walmart had earned $1.48 per share, so Walmart’s profitable quarter wasn’t profitable enough.

McMillon undoubtedly knew ahead of time that some shareholders would be disappointed. He admitted that Walmart’s bottom-line results “were unexpected and reflect the unusual environment,” while assuring that the company is “adjusting and will balance the needs of our customers for
value with the need to deliver profit growth for our future.”

The point here is that Walmart’s management is fully aware of the macro-level headwinds, and long-term investors should remain patient. Looking ahead, Walmart raised its guidance on the company’s full-year fiscal 2023 consolidated net sales from 3% to 4%. This suggests that Walmart’s executives expect the company to stay on track and generate solid revenue despite inflation and supply-chain bottlenecks.

There’s no way to know how long it will take for these macro-level issues to be resolved. However, Walmart’s investors can stay in the trade and collect dividend payments in the meantime.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, WMT is a Strong Buy, based on 12 Buy and two Hold ratings. The average Walmart price target is $160.86, implying 22.47% upside potential.

The Takeaway

Were Walmart’s quarterly results really all that bad? Did they justify an outsized selling spree? It is true that the company’s quarterly profits fell short of Wall Street’s expectations, but then, perhaps those expectations didn’t fully factor in the challenges that so many retail stores are facing nowadays.

So, like a Sam’s Club member, an informed investor should be able to appreciate a discount. There’s a bargain right now to be found in Walmart stock, as the company fully understands its problems and is prepared to deal with them while continuing to deliver great value to the shoppers and the shareholders.