Is Walmart stock overvalued or undervalued?
Walmart Inc Stocks (NYSE: WMT) have lagged the S&P 500 in 2021, generating a total return loss of 4.1% year-to-date.
Walmart’s business has held up relatively well throughout the economic downturn of 2020, but investors may wonder how much the retail giant’s shares are worth.
Earnings: A price-to-earnings (PE) ratio is one of the most basic fundamental measures to assess the value of a stock. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently around 33.4, more than double its long-term average of 15.9.
Walmart’s PE is currently 38.5, above the average for the S&P 500 as a whole. Walmart’s PE ratio has also increased 150% over the past five years, suggesting the stock price is at the high end of its historic valuation range.
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Growth: Looking ahead to the next four quarters, the S&P 500 futures PE ratio looks much more reasonable at just 20.3. Walmart’s futures earnings multiple of 20.7 roughly in line with the S&P 500 multiple as a whole, which makes Walmart stocks seem quite valued.
Walmart’s futures PE ratio is also in line with its peers in the consumer staples sector, which average a futures earnings multiple of 20.1.
However, when it comes to valuing a stock, profits aren’t everything.
Growth rate is also critical for businesses that build their bottom line quickly. The price / earnings / growth ratio (PEG) is a good way to incorporate growth rates into the valuation process. The overall PEG of the S&P 500 is around 0.9; Walmart’s PEG is 4.8, which suggests that Walmart is significantly overvalued after taking its modest growth into account.
The price-to-sales ratio is another important valuation metric, especially for unprofitable companies and growth stocks. The S&P 500’s PS ratio is 3.08, well above its long-term average of 1.62. Walmart’s PS ratio is only 0.68, significantly lower than that of the S&P 500.
Finally, Wall Street analysts see the value of Walmart shares over the next 12 months. The average analyst price target among the 32 analysts covering Walmart is $ 170, suggesting an increase of about 24.4% from current levels.
The verdict: At today’s price, Walmart stock appears to be reasonably priced based on a sample of common fundamental valuation metrics.
Photo courtesy of Walmart.
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