Walmart (WMT, Financial) stock has outperformed the index after bottoming out at $73.82 on October 16, 2014. Currently, the stock trades at $86.66 and I believe that the stock will continue to outperform the index in the coming months. Therefore, investors can consider exposure to Walmart even at current levels.
Among the biggest positive factors for Walmart is the recent trend in consumption spending. U.S. third quarter GDP surged by 5% in the third quarter of 2014 and one of the important growth drivers for the surge in GDP has been the consumption spending.
According to the GDP data, the personal consumption expenditure grew (percentage change from preceding period) by 3.2% for the third quarter of 2014 as compared to a growth of 1.2% and 2.5% in the first quarter and second quarter of 2014 respectively.
Therefore, the improving trend in personal consumption is clear and an increased spending is backed by an improving job market. This is certainly positive for retailers like Wal-Mart. I also believe that U.S. fourth quarter GDP will remain robust and personal consumption expenditure will also remain robust.
With consumer confidence at its highest levels since the financial crisis, it is likely that consumer spending has already been strong in December 2014 and will continue to be strong in January 2015. This will take Walmart higher from current levels over the next 2-3 months.
The time to be cautious on Walmart will be when the festive season is over. Therefore, the spending trend in February 2014 and March 2014 will be critical to watch. However, for the next 1-2 months, the stock will trend higher and provide better returns than the index.
From a growth in consumption perspective, even Costco Wholesale (COST, Financial) is attractive. However, COST is trading at a trailing twelve month PE of 29.9 while Walmart is trading at a TTM PE of 17.8.Therefore, from a valuation perspective, Walmart looks relatively attractive.
Further, Walmart is also attractive from a dividend perspective. The stock offers dividend of $1.92 per share as compared to COST’s dividend of $1.42 per share. I therefore expect the upside to be more significant for Walmart in the next 1-2 months.
Amidst the positive, the minimum wage hike across the United States will impact 1,400 Walmart stores on an immediate basis and the impact of the minimum wage hike on the company’s margin in the coming quarter remains to be seen. However, I believe that this news will not impact the company’s positive momentum as it will be more than offset by the positive factor of strong consumption growth.
From a forward valuation perspective, Walmart is trading at a forward (January FY16) PE of 16.5 and this is another reason to remain bullish on the stock. As U.S. markets reach new highs, it is important to have stocks like Walmart in the portfolio as it is a low beta stock.
In conclusion, the coming few months will remain exciting for Walmart and investors can expect strong results from the coming in the coming quarter result release. I will also watch with great interest the company’s growth in online sales. Ecommerce can be another big growth driver for Walmart in the coming quarters.
