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Walmart, Target Screaming ‘Buy Me’ -- ICYMI

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Walmart  (WMT) - Get Walmart Inc. Report and Target  (TGT) - Get Target Corporation Report shares have sold off in 2020, while their fundamentals look stronger. That’s as classic a buying opportunity as there ever will be. 

As the Coronavirus has struck the U.S. economy hard, keeping consumer inside, the one place people need to visit is the grocery store. And Walmart and Target have the army of options, store count and e-commerce capability to capture the virus-wary consumer looking to stock up throughout the year.

If Costco  (COST) - Get Costco Wholesale Corporation Report earnings are any evidence, the consumer is fully focused on staples-buying right now. 

Meanwhile, Walmart and Target shares are down 7.3% and 25% from their all-time highs, respectively. Both all-time highs came after Christmas time. Walmart has outperformed the S&P 500, which has fallen 23% from its all-time high in February, but is trading far lower than its previous level, which was before the consumer mad-dash for groceries and essentials. 

The broader consumer staples landscape is down roughly 10% from its aggregate 2020 high, according to several S&P 500 staples ETFs. 

In a panic to raise cash, investors sold al types of equities, including S&P 500 indexed funds, likely a large part of these share price drawdowns. 

For Walmart and Target, “In the short term, we expect demand to remain robust, even if panicked buying subsides, given the companies’ mix of essential/grocery,” wrote Goldman Sachs analyst Kate McShane in a note. "Further, these stores will likely remain open (versus over half of retail in the U.S. that is currently closed), even in states that have “shelter in place” rules.” Those are reasons “these Stocks Should Work in the short term,” McShane said, as the virus dynamic provide a lift to revenue and earnings for the next year. 

For the full year ahead, Walmart could see same-store-sales growth accelerate to 2.7% and Target could see the metric accelerate to 3.7%, according to analyst polled by FactSet. Walmart and Target analysts are looking for earnings per share growth for the next year of 3.8% and 4.6% receptively. 

And McShane is raising her estimates for both companies. Even with gross margin compression due to a higher product sales mix towards staples rather than higher priced discretionary items, McShane is looking for Walmart’s EPS for the calendar year 2020 to come in at $5.70, well above the consensus view of $5.12 and reflecting growth of 15% year-over-year growth. 

She raised her price target to $121 from $115, using a multiple of 21 times 2020 earnings. As the stock has fallen, the earnings multiple on 2020 earnings hasn’t, as it currently stands at 22 times. This leaves earnings estimates on a rolling 12 month to go higher, should the stock move up to the magnitude McShane think it can, though her base case doesn’t look for huge gains from here. Positively, she did lift 2021 estimates.

So the stock could do nicely, but if the market rips back higher if the virus dies soon, it cold be an underperformer. Investors seem to have been recognizing McShane’s thesis, with shares up 9% since March 12.  

For Target, earnings growth cold look robust, according to McShane, but she also points out the company is trading at an attractive 14.3 times forward earnings, versus its pre-virus multiple of 17. McShane has a $105 price target, representing 9% upside. She did not disclose earnings estimates. 

Even at that valuation, bulls had pointed out that Target was to see improving operating margins — towards 6% and above Walmart’s sub-5% — as well as improving same-store-sales growth. Target, then, deserved a valuation of closer to 20 times, some said. But after a disappointing holiday quarter, investors grew wary again, pushing the multiple down to where it is now, leaving the stock attractive on a one-year basis. Margin and expansion and same-store-sales above growth higher than Walmart’s now looks slightly less likely, albeit strong. 

While Target may have more upside for multiple expansion in the medium-term, Walmart may have a slight one-year advantage. Walmart’s sales are usually comprised of roughly 30% discretionary items like apparel, leaving the business mistily staples weighted. Target is still very much a staples business, with discretionary goods at around 56% of revenue and an increase focus on groceries going forward. 

For the longer-term, both companies have slower but stable outlooks. Post-Recession, they could remain solid picks for the defensive portion of a stock portfolio. 

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