Here's Why Analysts Boosted Walmart Stock's Valuation

Key Points

• As the economy needs more thoughtful companies to protect the inflation-choked consumer, Walmart's analysts saw more reasons to boost the stock. 
• By cutting prices on thousands of items, the company is now expecting to see a continuation of its past double-digit growth rates in EPS. 
• Profitability rates allowed for more share buybacks, a sign that the stock's new all-time high isn't near the full valuation potential.

Shares of Walmart Inc. NYSE: WMT are reaching a new all-time high this week after analysts at HSBC decided to boost their price targets on the stock higher. Seeing the company’s valuation as high as $81 a share, daring the stock to rally by an additional 22.2% from its already elevated levels today. These aren’t the only analysts seeing the stock’s potential being this high.

Those at J.P. Morgan Chase & Co. also see the stock potentially going higher to the same $81 level, and today’s economy has everything to do with it. It looks like stocks willing to step away from corporate greed, despite the opportunity to keep margins at record highs, are receiving most of the market’s attention and reward through more bullish price action.

Restaurant stocks like McDonald’s Co. NYSE: MCD and Yum! Brands Inc. NYSE: YUM is experiencing the same dynamic, as markets are now rewarding how Yum! is willing to help today’s inflation-choked consumer. At the same time, McDonald’s takes advantage of today’s market by passing costs onto the consumer to expand margins.

Walmart's Price Reductions: A Welcome Relief in Today's Economy

Walmart has historically been the discount consumer staples stock that people go to for their home and grocery needs. Hence, its brand moat carries some goodwill apart from unrepeatable strength.

Walmart is now cutting prices on thousands of items across its locations to build more upon this popularity. Joining this trend comes Target Co. NYSE: TGT, Walgreens Boots Alliance Inc. NASDAQ: WBA, and even Amazon.com Inc. NASDAQ: AMZN.

Because today’s consumers have had to deal with higher interest rates, making shopping on credit cards all that much harder, going to Walmart and seeing lower prices is a welcome relief sure to be rewarded by more shopping volumes and foot traffic.

More than that, the U.S. economy is suffering from an economic phenomenon called stagflation, which is defined as low economic growth and high inflation. Now that inflation stood above 3% over the past quarter, and U.S. GDP growth was revised to 1.3%, the economy begins to fit the stagflation definition.

For this reason, earnings per share (EPS) growth is becoming more critical than ever. While some may worry that lower prices could undercut Walmart stock’s EPS growth, the opposite is true.

What Drives Walmart Stock's Promising Growth Prospects for the Future

Trends in the Consumer Discretionary Select Sector SPDR Fund NYSEARCA: XLY show why Walmart stock is set up for success in the coming months.

Over the past 12 months, Walmart has outperformed the sector by as much as 20%. The same is true for the Consumer Staples Select Sector SPDR Fund NYSEARCA: XLP, as Walmart outperformed it by up to 25%.

Price action is driven by Walmart's passing short-term profits to help its consumers access more affordable items during this economic storm. Looking at the past to guide Walmart's future potential growth, investors can find this in the company's latest quarterly earnings report.

Earnings per share grew from $0.21 in 2023 to $0.63 in the most recent quarter, reporting a growth rate of 200% over the year. Considering that analysts only see single-digit growth in EPS for the next 12 months, investors could safely assume that these projections may be on the conservative end of the spectrum.

Finding another reason to justify more than today’s growth projections and backing HSBC’s new price target, investors can look to Walmart’s recent margins and return on invested capital (ROIC) rates to predict what the stock could do next.

The Role of Walmart Stock's Profits in Enhancing Future Investor Returns

Of course, with these new growth prospects under its belt, Walmart’s management is looking to reward those shareholders who patiently stuck with the company despite these decisions to cut prices on items, which could seem to hurt the company’s profitability.

Recent results show up to 15% ROIC rates and a net operating cash flow of $4.2 billion. These figures allowed management to buy back as many as 18 million shares in the open market for a total value of $1.1 billion.

Share buybacks can significantly boost investor returns over time, so management knows exactly what it’s doing when allocating large amounts of capital to buy back stock despite it being near all-time highs.

Knowing that standing in the way of a company looking out for today’s inflation-choked consumer could be futile, bearish traders decided to step out of the picture. Over the past month, Walmart’s short interest declined by 7.7%, opening the way for bullish traders and investors to take over.