Cowen's Big-Box Pair Trade: Wal-Mart Upgraded, Target Downgraded

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Cowen believes
Wal-Mart Stores, Inc. WMT
is all set to regain its dominance in the retail sector. Analysts Oliver Chen and Steven Zaccone think a combination of investments like its Jet.com acquisition and creative integration of its physical and online divisions bodes well for the name. Therefore, the analysts upgraded the stock from Market Perform to Outperform and lifted the target price from $76 to $83.

On the other hand, rival Target Corporation TGT was downgraded from Outperform to Market Perform. The analysts are not confident that the company's recent moves could reignite comps growth. They therefore reduced the price objective from $75 to $68 on the stock.

The brokerage is not worried even if Wal-Mart were to provide a negative surprise during analyst day in October; it has already factored in such a possibility. Cowen thinks that the retailer could achieve stable comps of 1–2 percent, with the possibility of adding more.

Related Link: Food Deflation Is "Great" For Consumers But "Terrible News" For Grocery Chains

As far as Target is concerned, the brokerage believes the company should depend heavily on its promotions to fuel solid results in the second half of the current year and early next year. However, that will not be easy given Wal-Mart's increased price points aggression.

"We're willing to look past EPS dilution as WMT reignites its e-commerce growth [...] Stronger e-commerce growth has been the missing puzzle piece for WMT, but we believe the Jet acquisition is a step in the right direction. We like the strategy to grow its online grocery pickup service," the analysts said.

At time of writing, Wal-Mart was up 1.72 percent at $71.51. Target was down 0.3 percent at $68.79.

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Posted In: Analyst ColorLong IdeasUpgradesDowngradesPrice TargetAnalyst RatingsTrading IdeasCowen & CoOliver ChenSteven Zaccone
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