Key insights
- Zacks Investment Management highlights Walmart as a buy due to strong revenue growth, successful e-commerce strategies, and attractive PEG ratio relative to peers like Target. The analysis suggests Walmart's operational excellence and ability to cater to diverse consumer segments drive its positive outlook, while Target faces challenges in earnings growth and balance sheet execution.
In the video above, Zacks Investment Management chief market strategist Brian Mulberry shares two of his favorite and least favorite stocks in the consumer sector.
You say Walmart is a buy and you talk about operational excellence, you mentioned the data analytics. Is that the story, Brian?
It absolutely is. So what you're finding from Walmart is they're able to grow an already huge pile of revenue. 180, 190 billion dollars every quarter in top line revenue and they're growing that by 10%. and that's because they're getting more wallet share but also increasing digital traffic. So now, they're competing on equal footing with Amazon for home delivery of everything. and they have the advantage of always having that generic parable of all of the items that they offer on the shelf. So they're having a great experience in engaging both those high income consumers as they want things delivered at home and name brands, but also the folks that are being a little bit more cost conscious can shop for the generic alternatives on the shelf. So they're executing their new e-commerce and digital strategies incredibly well and it's reflective of the growth of earnings that we're seeing over the next year.
In your opinion, valuation still attractive here?
Absolutely. So looking at the PE it's at 45 and you might think, wow, that seems to be a high valuation. But when you add back that 10% earnings growth, the peg ratio is still really attractive relative to some of its other peers in the space. An example would be Target, right? When you look at Target kind of declining earnings there, they are having a little bit of a renaissance the last couple of weeks because the new CEO is trying to turn things around at least visibly to the market, but the execution on the balance sheet is lagging. earnings very small growth around 3%. And so when you look at their PE ratio of around 20, their peg ratio is still north of five. So that still makes Walmart even a better technical buy in this moment in time.
You also like TJX, Brian. You say the business model translates well to consumers right now. How so?
Well, you know, they offer obviously name brand goods at discount prices. And one of the biggest advantage they have that protects their margins is they're not really paying the higher input costs. Things are already onshored somewhere else. I mean that they pay the higher fuel cost of delivery but also any tariffs or duties that might be involved in the process of onshoring those types of products. So consumers can go there, enjoy the discounts and not have to pay all of the extra fees to make that TJX profitable. They're doing a great job of engaging, providing that sense of value where you get really good name brands at a big discount, and that's really relating to both sides of consumer spending right now.
No love here for Lowes. How come?
Really again, one of those things where uh customer engagement is down. When you just look at, you know, same store foot traffic, they're down. They're just not connecting with consumers in a way that's showing that they have enough value. The bright spot is in their pro segment where they are having a little bit better engagement with contractors, but quite honestly, Josh, that's just spill over from the mega success that Home Depot's been having. So, there's such a backlog of of weight times for contractors at Home Depot. They're having to go to Lowes to get bulk stuff there. On the retail consumer side, Lowes is losing that foot traffic game. and if they end up having to discount some of their prices on the shelves to get more people in the stores, again, you can just see how that adds pressure negatively to their future profitability.
And then there's Target, Brian, you mentioned that one earlier, but but pull on that thread for me. What what's the issue there? Why would you avoid that one?
They're just consumers at Target, the the the old guard customers have kind of transitioned to Walmart because they they just don't understand what Target's brand is anymore. We know that coming through COVID, they had to make a decision on how they were going to handle their over supply of goods that just didn't sell during the pandemic because you couldn't go shopping, right? And they ended up discounting a whole bunch of stuff and that changed the business model in consumer's minds now five years later where they're still waiting for Target to have a big discount sale. That's not the model that Target wanted. They they spent 25, 30 years trying very much not to be Kmart, but now they've retrained their customers to just simply wait for the summer clearance sale, almost like an Amazon Prime day. and that's what customers are doing. They're just waiting. So consumer traffic is down, same store sales is down and they're just barely keeping even on per ticket sales. So, it's really just not a growth story at all. They've got a lot of work to do to regain consumer trust at this point.