Is Walmart Stock Overvalued Or Undervalued?

Walmart Inc WMT shares have lagged the S&P 500 in 2021, generating a year-to-date total return loss of 4.1%.

Walmart’s business held up relatively well throughout the 2020 economic downturn, but investors may be wondering just how much value there is in the retail giant’s stock.

Earnings: A price-to-earnings ratio (PE) is one of the most basic fundamental metrics for gauging a stock’s value. The lower the PE, the higher the value. For comparison, the S&P 500’s PE is currently at about 33.4, more than double its long-term average of 15.9.

Walmart’s PE is currently 38.5, above the S&P 500 average as a whole. Walmart's PE ratio is also up 150% over the last five years, suggesting the stock is priced at the high end of its historical valuation range.

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Growth: Looking ahead to the next four quarters, the S&P 500’s forward PE ratio looks much more reasonable at just 20.3. Walmart’s forward earnings multiple of 20.7 is roughly in-line with the multiple of the S&P 500 as a whole, making Walmart stock look fairly valued.

Walmart’s forward PE ratio is also in-line with its consumer staples sector peers, which are averaging a 20.1 forward earnings multiple.

Yet when it comes to evaluating a stock, earnings aren't everything.

The growth rate is also critical for companies that are rapidly building their bottom lines. The price-to-earnings-to-growth ratio (PEG) is a good way to incorporate growth rates into the evaluation process. The S&P 500’s overall PEG is about 0.9; Walmart’s PEG is 4.8, suggesting Walmart is significantly overvalued after accounting for its modest growth.

Price-to-sales ratio is another important valuation metric, particularly 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 just 0.68, significantly lower than the S&P 500.

Finally, Wall Street analysts see value in Walmart stock over the next 12 months. The average analyst price target among the 32 analysts covering Walmart is $170, suggesting about 24.4% upside from current levels.

The Verdict: At today's price, Walmart stock appears to be reasonably valued based on a sampling of common fundamental valuation metrics.

Photo courtesy of Walmart.