Why Walmart is a must-own retail stock during the worst of the coronavirus pandemic - Yahoo Money

It pays to be a retailer selling toilet paper, Spam, mac and cheese, bleach, soup and work from home paraphernalia all under one roof during the worst of the coronavirus —whether that roof is in stores or online.

In other words, it pays to be the world’s largest retailer Walmart (WMT). And it could continue to pay for investors to sit tight with the stock, according to veteran Guggenheim Securities retail analyst Robert Drbul.

“Throughout the past ~month, we believe Walmart has significantly increased trust with consumers through hiring efforts, logistical expertise, and its ability to deliver for customers. We believe this will be critical for sustained market share gains in the coming months/years,” Drbul said in a new note to clients on Monday where he reiterated a Buy rating and $135 price target. Drbul views Walmart as one of the best defensive stocks to own in the current uncertain environment.

Drbul points to several reasons for his optimism:

• In a new survey of 1,040 U.S. consumers, Drbul notes that 70% believed the country is entering a recession and are dramatically changing their shopping habits. In Drbul’s eyes, this “new normal” should play right into the low price leader Walmart’s business model similar to trends during the Great Recession.

• Drbul thinks Walmart is among the most “logistically capable” companies in the world. The analyst gives Walmart high marks for expanding its online grocery pickup to more than 3,200 U.S. stores and the recent hiring of 100,000 workers to restock empty shelves amidst coronavirus panic buying.

• Unlike others in retail, Drbul believes Walmart isn’t at risk of cutting its dividend or other shareholder unfriendly capital allocation actions. “With Walmart having remained open throughout the COVID-19 outbreak in the U.S. and given the company's strong balance sheet/access to cheap capital, we would not expect any change to the shareholder return policy despite Walmart continuing to invest in associates (~$550 million total in special and accelerated 1Q bonuses),” Drbul says.

The bullish Walmart trade has been in full effect for the better of the past month as shoppers flock to big box stores for essentials.

COCONUT CREEK, FL - APRIL 04: Shoppers stock up as Walmart on Saturday began limiting the number of customers who can be in it's stores at once due to the Coronavirus (COVID-19) pandemic on April 4, 2020 in Coconut Creek, Florida Credit: mpi04/MediaPunch /IPX

Walmart’s stock has surged 19% in the past four weeks versus the 12% rally in the S&P 500. Shares trade at a forward price-to-earnings multiple of 23.7 times compared to a historical average of 20.9 times, per Bloomberg data. The stock also trades at a relative premium to rivals Target (forward P/E ratio of 14.7 times) and BJ’s Wholesale (forward P/E ratio of 16.5 times), per Yahoo Finance Premium data.

Walmart shares have received four sell-side analyst upgrades since mid-March.

But based on Drbul’s analysis — and a good dose of commonsense — one has to wonder if Wall Street fully grasps the upside potential to Walmart’s business at the height of a major health pandemic. First quarter analyst profit estimates on Walmart have only climbed 5% in the last four weeks, according to Bloomberg data. For the full-year, Walmart’s profit estimates have been marked up by a mere 1%.

Those estimates are likely headed higher into Walmart’s first quarter earnings report in mid-May. By then, the stock could be a few percentage points higher than where it trades today.

Brian Sozzi is an editor-at-large and co-anchor of The First Trade at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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