Walmart Inc (NYSE:WMT) has maintained its Buy rating from UBS, with the broker noting that the momentum it experienced into the end of calendar year 2022 had continued into 2023.
Following the release of its first-quarter results, UBS said in a note this week that it was increasing its price target for the retail giant to $173 from $170 as market share gains in groceries more than offset weakness in consumer discretionary categories.
“Its value proposition is appealing to consumers across income cohorts as they become more price sensitive in this environment,” the UBS analysts wrote. “That said, we do not think WMT is simply resting on its laurels.”
UBS said the company is making strides to build on other areas of its business, including Delivery/Pickup, WMT Connect, WMT+, and driving efficiencies across supply chain automation and last-mile delivery efforts that should serve it well in the long run.
“The combination of these factors support the bull case for WMT, in our view, and should push shares higher from here,” the analysts added.
While weakness in Walmart’s discretionary categories has shown no signs of abating, aside from small gains in auto and seasonal products, the analysts said this was probably already anticipated and built into its shares. As inflation eases in high-frequency categories, they expect to see discretionary sales bounce back.
eCommerce surprise
However, it was the retailer’s eCommerce results that provided the ‘upside’ surprise in 1Q, with US sales growth of 27% surpassing Amazon’s 11% increase in its North American net sales during the same period, excluding physical store sales.
“WMT's digital growth was driven by strength in-store pickup & delivery. Plus, WMT US' advertising business, WMT Connect, grew by nearly 40% in 1Q,” the analysts noted. “We recently took a deep dive into WMT Connect to better understand the business' long-term earnings accretion potential."
On expenses, UBS said despite managing them well Walmart faced increased pressure from the mix due to the shift from general merchandise to consumables.
Putting forward the ‘bulls’ case for Walmart, UBS said the company guided cautiously for full-year 2023 leaving room for higher estimate revisions this year.
“The bulls believe WMT can continue to grow market share especially in areas like grocery where it continues to attract higher-income customers,” they wrote. “The bulls also argue that WMT's alternative profit streams offer greater upside to earnings than what the market currently assumes.”
UBS said its higher price target is calculated on roughly 24 times its higher earnings per share target for the 2024 calendar year.
"We think Walmart's shares are undervalued at current levels," they concluded.
Walmart's shares were little changed at $148.46 in late morning trade in New York.
Contact the author at stephen.gunnion@proactiveinvestors.com