Buy Walmart Stock, Sell Target, Analyst Says - Barron's

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Walmart stock (ticker: WMT) is trading higher on Friday while Target (TGT) is falling, after Bernstein argued that the former was a buy, and the latter may see its rally stall.

The Back Story. Walmart has trailed the broader market this year, rising 9.6%, and it’s gained 16.6% in the trailing-12-months period. The stock struggled in 2018, but has fought its way back this year, thanks to upbeat earnings and a dividend hike in February. The company is making headway with its own e-commerce offerings and technological innovation, earning analyst praise for its ongoing omnichannel innovations including curbside pickup and new fintech payment options, while also gaining share in the battleground of grocery.

Target has gained 15.1% year to date, and risen 7.1% in the last 12 months. Analyst have cheered the stock, crowning it one of the holiday season’s clear winners, as evidenced by Target’s robust fourth-quarter-earnings report in March and its progress in fending off Amazon.com (AMZN). Others highlight how reasonable its valuation is.

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What’s New. On Friday, Bernstein analyst Brandon Fletcher upgraded Walmart to Outperform from Market Perform and raised his price target to $115 from $99. He writes that while the company hasn’t been able “to return to its full potential” for decades, “the fully realized vision of what Walmart could be is so fantastic that, if Walmart even accidentally leans in the right direction, we think it could create an outsized investment return over several years.”

By contrast, he downgraded Target to Market Perform from Outperform and lowered his price target by $2 to $75. He writes that despite being a long-time Target bull, his view has “evolved” after the stock’s rally and management’s recent tone, to the point that he thinks “Target’s continued emphasis on growth over cost containment (even as a message for internal consumption to keep optimism high) is a stance that we think is less wise at this point.”

Looking Ahead. Fletcher argues that his faith in Walmart isn’t because he thinks they’ve cracked the e-commerce code, or can find a cheaper way to ship things faster than Amazon. Rather, he thinks that the company is getting back to doing what it’s done best for years. He thinks that new leadership is getting back to what’s worked for the company, in terms of cost savings and strategy, as Walmart stands as the only real full-scale Amazon challenger, given its breadth of products and fulfillment options. “The tipping point is nigh where comparable-sales growth (better in eventual slowdown, maybe fourth quarter) and cost control (aided by better pick-up) should flip Walmart back to sustainable expense leverage.”

As for Target, Fletcher thinks that the company is ignoring cost controls even as we “near peak everything,” and while they have their own niche apart from Walmart, that position is less defensible from online disruption. In addition, he warns that “Target may be at the earnings stalemate point where cost pressures (i.e. wage rate, online margins) are overwhelming cost offsets (i.e. labor savings, supply chain).”

When it comes to companies that can survive in the new retail, there are few analysts that would discount Walmart and Target entirely, given their long history of success, deep pockets, and huge network of stores that can be repurposed for more omnichannel flexibility. That may be less helpful in terms of predicting what the near-term stock prices will do, but over the long term few are willing to truly bet against the two, despite how quickly the consumer landscape continues to change.

Walmart is rising 0.9% to $102.07 this morning, while Target is down 0.9% to $75.74 in recent trading.

Write to Teresa Rivas at teresa.rivas@barrons.com

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