Walmart Inc (NYSE:WMT) is expected to post “very good” second quarter fiscal 2024 financial results before the market opens on Thursday, August 17, which will push consensus forecasts higher and in turn drive momentum in the stock, according to analysts at UBS.
“Its model is not only at the right place at the right time, in our view, but it's also executing at a very high level,” the analysts wrote in a note to clients. “Overall, this makes the story behind its investment case compelling.”
They added that, importantly, they believe the company will provide evidence that it can sustain its momentum into the second half of 2023 and beyond with its 2Q report.
“This is likely to drive further upside revisions to consensus estimates, which should push the stock higher over time,” they wrote.
Wall Street analysts, on average, expect Walmart to report earnings per share (EPS) of $1.69 on $159.82 billion in revenue for 2Q. The UBS analysts also forecast EPS of $1.69, above Walmart’s guidance of $1.63.
For 2Q, the UBS analysts noted that the same factors that have benefitted the company in previous quarters were likely to have continued, resulting in strong topline performance and its gaining of further market share.
“First, while headline inflation continues to moderate it remains elevated. So, we think it resulted in high single-digit to low double-digit growth in grocery and consumables,” they wrote.
“Plus, growth in health and wellness, driven by its pharmacy business, likely added 100 to 200 basis points to the topline. So, comparable sales upside should translate to a healthy topline beat.”
They also believe Walmart’s 2Q gross margin saw a modest contraction driven by product mix to consumables and strong growth in its pharmacy business.
They wrote that Walmart's pharmacy has been fulfilling a lot of GLP1 prescriptions like Ozempic that generate $500 to $1,000 of topline for each script, but only about $5 to $10 of profit, and they believe sales of the GLP-1 drugs could have been even higher in 2Q.
However, they pointed out that these pressures would have been partially offset by lower supply chain and transportation costs.
“We model a 6 basis points contraction to 23.4% (as a percentage of net sales), which compares to the consensus of 23.5%,” they wrote.
The analysts added that they believe Walmart’s shares are currently undervalued, trading hands at US$159.50 on Wednesday morning.
They awarded the stock a $173 price target, based on 24 times their 2024 calendar year EPS estimate, and a ‘Buy’ rating.
Contact the author at emily.jarvie@proactiveinvestors.com
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