The threat of disruption in the U.S. brick-and-mortar retail sector is still very real, but Wal-Mart Stores Inc (NYSE: WMT) has put itself in a position to participate in the disruption rather than fall victim to it. On Thursday morning, Goldman Sachs analyst Matthew Fassler upgraded Walmart stock from “neutral” to “buy” and said personal tax reform and rising U.S. income levels will boost Walmart in coming quarters.
“Recent better results notwithstanding, retail is still subject to significant disruption, while WMT, we think, is still very much in control of its own destiny,” Fassler says.
Goldman Sachs has raised its 2018 same-store sales and earnings per share estimates for Walmart by 1 percent each. The firm now expects EPS of $5.40 and $5.72 in 2018 and 2019, respectively. Fassler also raised his price target for WMT stock from $115 to $117.
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Walmart recently made headlines by raising its starting wages from $10 per hour to $11 per hour in the wake of corporate tax cuts. The company also said it will be returning some of its tax savings to eligible employees by paying out cash bonuses of up to $1,000.
Fassler says Walmart will also reinvest a significant portion of its tax savings in its business, but shareholders will certainly get a big taste as well.
“We expect a meaningful dividend hike as the firm redeploys cash from tax savings and repatriated overseas cash,” Fassler says.
Fassler estimates tax reform will directly boost Walmart’s 2018 EPS by 12 percent, slightly less than other retail companies with primarily domestic businesses. Goldman estimates the average U.S. retail stock under its coverage will get a 19 percent earnings boost from tax reform.
Fassler isn’t the only analyst bullish on Walmart in 2018. Last month, MKM Partners analyst Patrick McKeever said Walmart has plenty of positive momentum.
“We think Walmart is continuing to benefit from investments in wages and training that have weighed on profitability but are contributing to cleaner stores, higher in-stock levels, better customer service and a faster check-out process,” McKeever said.
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In terms of risk, Fassler says Walmart investors should always keep an eye on Amazon.com ( AMZN), and if enacted, proposed entitlement reforms could hurt Walmart’s lower-income consumer base. Fassler also says the stock is currently trading on the high end of its historical valuation range.
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Wal-Mart Stores Inc (WMT) Reaps Rewards From Big Investments originally appeared on usnews.com
