Wal-Mart finding favor with some on Wall Street, but not everyone is buying

Bentonville behemoth Wal-Mart Stores draws a wide range of opinions, but as a long-term investment the retailer’s stock has performed well despite a lag during the past three years.

That said, more analysts are now following Wal-Mart shares and the retailer is heralded for its better-than-expected first quarter results posted a week ago amid a plethora of disappointment in the retail sector.

Barron’s contributor Vito Racanelli recently noted to investors there are a few companies surviving a reset from the onslaught of online competition from Amazon. He puts Wal-Mart in that short list of survivors. Gordon Haskett Research Advisors recently initiated coverage of Wal-Mart one week ahead of earnings. The analyst rated the stock a “buy” with an aggressive one-year target price of $90.

“We’ve long been critical on Wal-Mart after years of under-investing and a lack of focus on its U.S. segment. However, this is not your father’s Wal-Mart anymore,” noted Chuck Grom, senior analyst with Gordon Haskett.

He said on the back end of $6 billion of investments to improve e-commerce capabilities and shopping convenience to more customers, Wal-Mart looks primed to regain its productivity loop momentum with traffic already bouncing back. Grom said it’s easier to keep positive momentum than to get it.

“Equally important, Wal-Mart is not backing down against Amazon. Instead, it’s building a digital ecosystem that should have tangible benefits across the enterprise. We think the stock is a prime candidate to be re-rated higher given both of the aforementioned factors,” Grom said.

Wal-Mart shares are up 14.2% year-to-date trading around $78.47 at mid-day Thursday. Shares rallied to $79.20 intraday on Monday before dropping back to the $78.15 range. The $78 to $79 price range is giving a few investors reason to pause.

Ben Bienvenue, an analyst with Stephens Inc., applauded the first quarter earnings results, but he kept the stock rated at equal-weight reiterating a “hold” rating. He said there’s a lot to like with decisions being made by management.

“Certain initiatives are yielding benefits in many of the company’s business segments. We also like the recent management additions, as we believe the company is prudently positioning itself to compete in the increasingly important e-commerce marketplace,” he said.

Bienvenue said it’s the lack of earnings growth that is keeping him on the sidelines for now.

“We fear that operating margin compression will continue through the remainder of this year. We will continue to monitor the competitive landscape and would get more constructive on shares if we saw a path to significant earnings growth or a pullback in the stock price,” he added.

Bienvenue said at the $78 price target shares are trading at 17.5 times earnings, which is pushing the upper limits. The better-than-expected first quarter results did cause Bienvenue to raise his full year per share earnings from $4.30 to $4.35 cents.

Analysts with D.M. Martins Research see Wal-Mart shares as a “conservative play” for investors, noting the retail giant is producing positive traffic and comp-store sales which is not an easy feat for brick and mortar stores in this competitive climate. The company’s 63% increase in online sales did not come at the expense of brick and mortar and that’s nearly unheard of today, analysts said.

When considering that consumer spending in the first quarter overall was up a paltry 0.3%, Wal-Mart’s same-store U.S. sales growth of 1.4% looks pretty spectacular, according to Budd Bugatch, an analyst with Raymond James & Associates.

“Admittedly, the lack of near-term earnings growth stretches Wal-Mart’s valuation on a multiple basis. Nonetheless, we are steadfast in our belief that management’s actions will continue to drive traffic and comp sales growth in the coming quarters and believe the risk/reward is still favorable,” he noted.

Bugatch rates Wal-Mart shares a “buy” and increased his one-year target price to $87, near the top of spectrum among analysts. The average price target among 35 analysts covering Wal-Mart is $79.55.

The Telsey Advisory Group and Bank of America recently upgraded Wal-Mart to “buy” positions from neutral stances. There are about 10 analysts giving the stock a “buy” rating. But there are 19 analysts like Bienvenue on the sidelines waiting for earnings growth to increase or the share price to recede before they urge investors to jump in.

Analysts from around the globe will have a chance to interview Wal-Mart execs next week (June 2) at the conclusion of the retailer’s annual shareholders’ meeting.