Can Wal-Mart Stock Rebound in 2016?

Walmart stock has reached its one-year low on the back of slowing growth but some analysts believe investors could be valuing the company too defensively

Walmart Stores Inc. (NYSE:WMT) stock has become the worst performer in its peer group this year owing to declining sales and increased competition from its rivals over the past year. Walmart stock was down 28.3% this year which was greater than Target Corporation’s (NYSE: TGT) decline of 1.94% in the same time frame. Currently the stock is hovering near its 52-week low of $56.3, lagging the S&P 500 index, which is up 1%.

According to analysts at Morningstar, Walmart’s fair value estimate stands at $75 per share. On the contrary, the company’s stock is trading at a 20% discount on its intrinsic estimated value, which makes the stock an attractive bet.

Walmart Stores has suffered from stagnant sales and reduced customer traffic due to increasing competition in the retail industry. E-commerce giant Amazon.com Inc. (NASDAQ: AMZN) has particularly posed some serious challenges for the largest brick and mortar retailer in the United States.

To offset the bearish sentiment triggered by online competitor sales, Walmart has made as much as $1.1 billion in e-commerce investments to bolster its revenues and growth in sales. Earnings however, are expected to remain suppressed over the next 12 to 18 months, while investors keep fueling the bearish rally over concerns that these investments may not be enough to boost sales growth.

Still, Morningstar believes that investors are underestimating Walmart’s earning power. The research firm claims that conservative analysts are placing a larger weight on the company’s store operating costs while neglecting higher shipment costs that dent many online retailers’ bottom lines. Walmart’s proximity to customers and distribution network has been overlooked completely in this regard. Traditional stores with a diversified distribution network can be effectively utilized to promote e-commerce, resulting in higher customer traffic.

The traditional retailer is known for its lower prices across the industry; it has long had a competitive cost advantage over rivals on stronger economies of scale. That leverage can be used to increase sales growth to normal levels once digital investments take off. The brick and mortar retailer’s sales growth has been stagnant over the past three years. Annual revenues came in at $485.5 billion in fiscal year 2015 as compared to $468.65 billion in 2013.

Walmart may have a higher cost of operations, but it also has a larger network than some disruptive rivals like Amazon, that translates into lucrative profit margins. The retailer’s operating margin of 4.87% in its latest quarter (3QFY16) was higher than Amazon’s at 1.6% in its last 3QFY15 quarter.

Walmart’s net profit margin clocked in at 2.91% in its third quarter (3QFY16) which was higher than its close rival Target Corporation’s margin of 2.71% in its latest 3QFY15. Walmart is trading at a one year forward price to earnings multiple of 15.67 times as compared to 14.45 times for Target Corporation.

According to Morningstar, investors may benefit from holding Walmart shares over intermediate to long term (three to five years). Notably, the retailer also promises increased shareholder value on the back of a $20 billion share buyback program slotted over the next five years.