Morgan Stanley Upgrades Walmart, Says Premium Valuation Is Justified

After showing five years of consecutive U.S. EBIT declines, retail giant Walmart Inc WMT should be able to show EBIT growth in 2019 as top-line momentum appear to be sustainable, according to Morgan Stanley.

The Analyst

Morgan Stanley's Simeon Gutman upgraded Walmart from Equal-weight to Overweight with a price target lifted from $107 to $110.

The Thesis

Gutman said over the past five years, Walmart's U.S. EBIT contracted on average by 52 basis points but management's dedication towards cost control, expense leverage, stopping all store expansions, zero-based budgeting, and moderating e-commerce dilution will help U.S. EBIT margins expand by one basis points. EBIT can expand without the need for the company to give up its reputation of offering customers low prices and a high level of convenience.

Meanwhile, Morgan Stanley's AlphaWise survey and research found Walmart is gaining market share in key categories, especially apparel, grocery, home furnishing, small ticket items and online shopping. The findings supports a view that a 2.5 percent comp growth in 2019 is "achievable."

Walmart's stock is trading at 20.5 times next-twelve months P/E and 10 times NTM EV/E/BITDA (or 18.5 times and 9.5 times excluding Flipkart acquisition), which Gutman said is a premium valuation versus the retail group but justified given a consistent improving sales and earnings trajectory and the stock's defensive nature minimizes downside risk.

Price Action

Shares of Walmart were trading higher by 1.5 percent at $98.89 Wednesday morning.

Related Links:

Walmart's EBIT Dilemma, And Why It Could Weigh On Shares Moving Forward

The Street Reacts To Walmart's Q3

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