Shares of Walmart (WMT 3.51%) traded roughly 4.3% lower, as of 1:18 p.m. ET. The stock received negative sentiment from Wall Street earlier today.
Valuation concerns
Walmart has been a superb stock to own. It’s up about 28% over the past year and 185% in the past five years.
Image source: Getty Images.
The company has moved beyond its traditional brick-and-mortar retail business and built out other successful revenue streams, including e-commerce, using its stores as fulfillment centers, a membership model, and even an advertising business.
But Wall Street analyst Hans Engel from the Austrian bank Erste Group thinks the valuation is now too high. At the time of the note, Engel noted that Walmart’s price-to-earnings (P/E) ratio was close to 47.
Today’s Change
(-3.51%) $-4.49
Current Price
$123.32
Key Data Points
Market Cap
$1.0T
Day’s Range
$121.66 – $125.65
52wk Range
$79.81 – $134.69
Volume
1.9M
Avg Vol
31M
Gross Margin
25.40%
Dividend Yield
0.74%
“The expected P/E ratio is currently much higher than the average of peer companies,” Engel wrote, lowering his rating on Walmart from a buy rating to hold.
Even strong companies have their limits
Engel’s note certainly raises a valid point. How many stocks that are considered defensive plays receive a valuation approaching 50 times earnings?
Walmart has certainly executed well, building out several powerful revenue streams. Stocks often trade at premiums when investors believe they have a perceived and lasting competitive advantage, or moat, in their industry.
Walmart has not only demonstrated consistent growth but is also a Dividend King, meaning it has paid and raised its annual dividend for over 50 years, which also appeals to investors who focus solely on passive income.
Ultimately, I think investors can continue to buy and hold Walmart as a long-term defensive play. However, the valuation is definitely high, which may limit its near- to medium-term upside.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool has a disclosure policy.
