This Walmart Rally has Legs: 20% Upside Left To Go

Key Points

• Walmart had a blowout quarter, outperforming on the top and bottom lines, with revenue growth accelerating sequentially. 
• The quarter was FCF negative but is not a worry, with earnings and cash flow expected to improve as the year progresses.
• Capital returns are reliable and include $1.1 billion in repurchases and a dividend in Q1. 

Walmart’s NYSE: WMT stock is rallying because of its industry-leading position and persistent growth. The Q1 results have spurred the market to new highs, suggesting the rally still has legs. There will be volatility; the market is unlikely to move higher in a straight line, but a 20% upside is possible before the end of the year. Analysts have lifted their targets steadily this year, and that trend is unlikely to change. The pre-release activity leads the market to the high end of the target range of $175, or about 20% above the post-release pop.

Walmart has Blowout Quarter: The Bar was Set Low

Walmart had a blowout quarter, with strength seen in all metrics. The caveat is that the bar was set low, with seventeen of the twenty-three revisions tracked by Marketbeat.com being lower. Regardless, the $161.5 billion in revenue is up 6% and outpaced the consensus by 200 basis points. 

All segments posted growth led by International with a 12.1% advance, 10.7% on an FXN basis. The US comps came in at 3.8%, driven 100% by transactions. Sam’s Club posted a solid 4.6% increase on a 4.4% gain in comps. Sam’s Club comps are also driven by transactions but offset by a slight decline in ticket averages. Sam’s Club also posted a solid 13% increase in membership income, indicating increased revenue and earnings leverage in upcoming quarters. However, the boost to Sam’s Club revenue may be short-lived. The company discounted memberships in April that may not get renewed the following year. 

eCommerce remains a driving force for Walmart. Global eCommerce sales grew by 21% on online, same-day, and delivery strength. The Global Ad business also did well, growing 24% and aiding the outlook. Strength in all categories also aided margin. The net result is a 9.6% increase in consolidated operating income, a 13.7% increase in adjusted operating income, and a 22.5% increase in adjusted earnings. Adjusted earnings came in at $0.60, beating the consensus by more than 1000 basis points. 

Guidance is among the factors driving the market. The company updated its guidance to the high end or above the previous range, above the consensus forecasts. Because the company has momentum and is gaining a share in today’s critical categories, including grocery, it may outperform its guidance and raise it despite general weakness in the retail sector. 

Walmart Capital Returns are Safe, Health, and Growing

Walmart was FCF negative in Q1, but this is not a concern. Free cash flow will improve as the year progresses, leaving the capital return in solid shape. Capital return in Q1 included the dividend and share repurchases worth $1.1 billion to investors or about 0.2% of the market cap. Repurchases reduced the share count by roughly 0.35% on average YOY in the quarter and should continue steadily this year. The dividend is worth about 1.45% annually to investors and aligns with the S&P 500 average. The distribution is growing and will likely increase by another mid-to-low single-digit amount this year. 

The technical action is promising. The Q1 results and guidance have the market up more than 5% and at a new all-time high. The move extends a rally in place, breaking the market out of a consolidation band, and suggests a $20 movement is in play. In this scenario, the market could advance to $80 and above the current high target set by analysts. The risk is that the market will fail to follow through on this move. Walmart shares offer an attractive price point for taking profits, which may cap gains over the summer. In this scenario, the market may pull back to retest support near $60 or lower before setting any more fresh highs.