Top Picks 2019: Walmart (WMT)

01/11/2019 5:00 am EST

Focus: CONSUMER

Joe Laszewski, CFA,CPA

Senior Portfolio Manager, Stack Financial Management

Walmart, Inc. (WMT) — our top growth pick for 2019 — is the world’s largest retail and wholesale business; while it is best-known for being a low-cost provider of consumer goods, they have also made some critical shifts to capitalize on their position in the marketplace, by utilizing their robust distribution network in the grocery business, Joe Laszewski, senior portfolio manager for Stack Financial Management.

Walmart has been winning at grocery by leveraging their scale and logistical expertise to offer better stock levels and fresher perishables, along with new innovations like online ordering, in-store pickup, and in-home delivery.  More importantly, the Company’s firm foundation in grocery helps to drive foot traffic into stores, where customers ultimately purchase higher-margin items.

The company's focus on grocery has helped them not only steal market share from traditional supermarket chains, but it also helps to insulate them from challenges facing many retailers that are losing revenue to online competition. 

The company recognizes how e-commerce has changed the marketplace and has also made several strategic acquisitions, the largest of which include Jet.com and Flipkart, to bolster its digital profile. Online sales growth is slated to come in around +40% in fiscal 2018, yet e-commerce is a significant opportunity to grow the top line, as it accounts for less than 5% of total revenue.

With stakes in China and India, Walmart is one of the few retailers positioned to participate in the world’s largest and fastest-growing economies.  These initiatives are working, as evidenced by U.S. comp sales growth recently posting the strongest 6-month period in over a decade. 

From a valuation standpoint, Walmart trades at a trailing 12-month price/sales ratio of 0.5, which is in-line with long-term historical averages.  However, the Walmart of tomorrow will not look like the Walmart of today.  The earnings and margin strain in the near-term, caused by dedicated investment in digital and logistics, will be met with accelerated revenue growth to drive share price appreciation. 

In today’s market environment, Walmart offers the valuable stability and defensive characteristics that one would expect of a well-established Consumer Staple.  However, the company has the scale, capital assets, and logistical expertise that virtually no one else has, giving them an opportunity to grow revenue in today’s highly competitive retail landscape.

With a continued focus on remaining a low-cost leader, while also improving the shopping experience, WMT carries wide appeal to both the baby boomer and millennial consumers.  Although Walmart is unlikely to quickly dethrone Amazon, the retailer is finding ways to leverage what they do best and take market share.

(Note: Clients and individuals associated with Stack Financial Management hold positions in, and may from time to time make purchases or sales of, this security.)

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