Morgan Stanley upbeat on Walmart’s cost-cutting efforts, raises rating

While revising its growth strategy in tune with the changes the retail landscape has witnessed in recent years, Walmart (WMT) made a conscious effort to plan the transformation in a sustainable manner. The cost-cutting measures adopted by the retailer, in its fight against the digital onslaught of Amazon (AMZN), got appreciation from Morgan Stanley this week.

The brokerage upgraded its rating on Walmart to overweight from equal weight and lifted the price target to $110 from $107, citing the stability of the stock despite the bearish earnings outlook for the retail industry. The research firm is tweaking its recommendation on the company after a gap of about four years. According to the analyst, the management’s ‘unprecedented’ commitment to cost-reduction has given the company an advantage over its rivals.

With operating expenses under control, Walmart is better positioned than most other retailers to offer the lowest possible prices to customers. Moreover, the company’s US division has remained resilient to the general headwinds and is on track to outperform the peers this year by achieving strong earnings growth.

With operating expenses under control, Walmart is better positioned than most other retailers to offer low prices

The majority of analysts recommend overweight rating on Walmart, with an average price target of $106. The company reported better than earnings for the past three quarters consecutively, mainly reflecting the growing strength of its e-commerce business. Interestingly, Walmart has broadened its market share in some of the highly competitive retail categories like grocery, home decor, and clothing.

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It is expected that Walmart will thrive on its strong fundamentals this year, despite the potential stress on earnings which is mostly attributable to the acquisition of Indian e-commerce firm Flipkart last year. There are concerns among market watchers about the growth prospects of Flipkart, which is currently fighting with Amazon in many regions to gain a foothold, except in the home market.

Hovering near the $100-mark, Walmart shares gained about 2% in early trading Wednesday maintaining the upward momentum seen since last month. The stock has lost more than 7% in the last twelve months, after hitting an all-time high. While the performance broadly matched that of the S&P 500 index during that period, Walmart has been on an upward trajectory for the last six months.

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