Walmart Gets Newfound Love From Wall Street - Here's Why

Walmart Inc. (WMT) has received two upgrades from Wall Street in less than 48 hours. 

Duetsche Bank analysts published a note Tuesday, Oct. 9, upgrading Walmart shares to "buy" from "hold," following by a day JPMorgan's note that lifted its price target on the stock to $108 from $103. 

"We are upgrading WMT to Buy (from Hold) as the retailer is reaping returns on the many years of investment in e-commerce and customer service, and we believe the company is now in position to accelerate market share gains in grocery while also growing EBIT {earnings-before-interest-and-tax} dollars," Deutsche Bank analyst Paul Trussell wrote in an note. Trussell's thesis was heavily predicated on digital sales. "The food retail landscape is rapidly changing due to high adoption rates of convenience/online grocery," he wrote. 

Walmart's latest quarter showed a 40% year-over-year increase in online sales. But Walmart could see more growth online sales, according to Trussell, who thinks Walmart is poised to take more market share in groceries. "Given the pace of disruption in the food retail landscape and our framework that the top players will reap the benefits of industry consolidation and increasing adoption of online grocery, we believe WMT is best positioned to continue to take both mind and market share going forward," he said. 

Online groceries in the U.S., as Trussell mentioned, are a high-growth business. Roughly 54% of grocery retailers have shopping apps, according to Statista. But there's one glaring data point that Walmart could be set to take advantage of: Less than 33% of U.S. grocers actually have pick-up services to go along with their apps, Statista said. Walmart introduced a two-day delivery service in January and it's not stopping there. Walmart plans to end the year with 2,100 locations with pick-up capabilities, up from the current 1,800, Trussell said. 

JPMorgan analyst Christopher Horvers wrote in his note that was giving Walmart "the benefit of the doubt on the heels of its strong store and online sales performance.

Walmart is expecting a 30% online grocery sales increase in fiscal 2019, Trussell said, below the 40% in its last earnings report. Costco Wholesale Corp.  (COST) , which seems to be nipping on Walmart's heels in digital sales, saw a 26.2% online sales increase in the fourth quarter, down from the 38.2% it saw in the third quarter. These figures are still above expectations for broader online grocery sales growth for 2019 of roughly 25%, according to Statista. 

Online retail, especially in the food category, is becoming increasingly competitive. While Deutsche Bank's Trussell asserted Walmart "could surpass Amazon by end of 2018" in groceries, Costco is also emerging as strong in digital sales. Costco has shown strong digital sales of late. Plus, most analysts have remained optimistic on Costco, precisely because of its online presence.

"Given (Costco's) expanding online offering and improved value prop from its Visa credit offering, we see a runway of share opportunity both in-store and online," Horvers wrote in a note published by TheStreet's sister website RealMoney. Costco's customer loyalty program is seen as a crucial strength and it has a 90% retention rate, according to Horvers. 

Walmart, while increasingly competitive in the food retail space, was seeing its stock rally Tuesday. Shares were up 2.42%. Besides the upgrades, the gains could possibly be spurred in part by a Bloomberg report saying Walmart's Canada business was exploring selling cannabis-related products. 

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