Walmart (NYSE: WMT) might just be the hidden gem your investment portfolio has been missing. True, this retail behemoth isn’t known for its excitement. It operates in a mature industry with tight profit margins and sluggish growth.
Unlike tech giants boasting profit margins upwards of 30%, retailers typically struggle to convert even 5% of their sales into earnings after covering hefty expenses.
But don’t underestimate Walmart as a solid long-term investment. It carries far less risk compared to many high-growth peers in the stock market. Moreover, it stands poised to enhance its earnings potential significantly in the coming years. And all this comes with a valuation that could look like a bargain in the near future.
1. It’s good to be the leader
Market dominance yields undeniable advantages for the leader in any industry, and Walmart stands as a prime example of reaping the rewards of such a competitive edge. Throughout the holiday shopping season, the chain witnessed robust sales growth, both in its brick-and-mortar stores and its online platform.
In fiscal Q4, Walmart reported a noteworthy 4% increase in comparable-store sales, building upon the previous year’s impressive 8% surge. This performance outshone competitors like Kroger and Target, propelling Walmart to gain market share in both the grocery and general merchandise segments.
Several factors contributed to this achievement, but the primary driving force behind Walmart’s success lies in its pricing supremacy. Its sheer scale enables the company to offer products at lower prices than its rivals, a significant advantage in any economic climate, particularly when consumers are seeking ways to trim their expenses.
With this momentum, Walmart is poised for further growth. CEO Doug McMillon expressed optimism about the company’s future prospects, emphasizing their commitment to continuing the trend of lowering prices for their customers.
2. It’s good to see earnings power expand
While Walmart may not typically boast remarkable profit margins, the chain’s earnings potential is on the rise. Over the past year, operating income has surged and is projected to once again outpace revenue in 2024. What’s particularly impressive is that these gains have occurred despite the company slashing prices amidst robust sales growth.
Much of this success can be attributed to Walmart’s foray into the realm of technology. For instance, its e-commerce sales soared by over 20% last year, surpassing the $100 billion mark.
Simultaneously, Walmart is doubling down on its digital advertising venture, as evidenced by its recent acquisition of Visio for $2.3 billion. Early indicators suggest promising outcomes, with the profit margin increasing by a full percentage point to reach 4.2% of sales.
3. It’s good to see a stock that’s priced just right
Despite not yet reaching the 6% profit margin seen in 2015, when Walmart initiated substantial investments in its omnichannel retailing platform, the company now possesses numerous promising avenues for growth that were previously unavailable, including e-commerce and digital advertising.
Considering these factors, Walmart’s shares appear undervalued at present, especially for those who anticipate the company maintaining its robust growth trajectory while gradually expanding profit margins towards that 6% benchmark. Currently trading at 0.7 times annual sales, the stock’s valuation sits towards the higher end, though not at its peak over the past five years.
In comparison, competitors like Target offer similar pricing but lack Walmart’s market dominance. Therefore, investors might view Walmart as an exceptional opportunity, offering stability alongside the potential for accelerated earnings growth.
