Wal-Mart Shares Are Upgraded

Bank of America cites its 'up-the-continuum' merchandise plan.
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Wal-Mart's

(WMT) - Get Report

efforts to make its clothes more fashionable and its electronics cooler should result in better-than-expected earnings and a higher stock price, Bank of America said in upgrading the shares Thursday.

Bank of America raised Wal-Mart to buy from neutral, upped its 2006 earnings estimate to $3 a share from $2.91, and upped its 2007 earnings estimate to $3.40 a share from $3.30. The brokerage's $55 price target on the stock reflects a price-to-earnings multiple of 16 over its new 2007 net income projection.

Wal-Mart shares closed Wednesday at $48.03, roughly 16.4 times Thomson First Call's 2006 earnings consensus of $2.93 a share and 14.5 times the 2007 estimate of $3.31 a share. The stock is up 3% since the start of the year, but is down 5% from its 52-week high of $50.87, hit Nov. 25, 2005.

Analysts cited three drivers in its upgrade: Wal-Mart's new "up the continuum" merchandising strategy, which stresses updated fashions and other merchandise in its stores; a belief that the company will slow its expansion and curtail store-to-store "cannibalization;" and rising gross margins from a "clean inventory position."

"We believe that WMT can work in both an offensive and defensive environment," Bank of America wrote. "In an improving economy, new merchandising strategies and the improved inventory position will drive accelerating comps and earnings resulting in multiple expansion. We also believe WMT has many defensive characteristics in a slowing economy."

While food and other consumables have driven same-store sales in the past, Bank of America noted, their burden was lessening.

"In 2005 we estimate comps for consumer electronics were in the highsingle digits, and for the first time in the last four years a category otherthan grocery increased its contribution to the overall sales mix in the U.S.discount stores," it wrote. "As the flat panel product cycle commoditizes over the next couple years, prices should move more towards the sweet spot for WMT customers and result in sustained above-trend comps in consumer electronics."