Why Investors Shouldn’t Be Surprised By Walmart Inc.’s (NYSE:WMT) P/E

When close to half the companies in the United States have price-to-earnings ratios (or “P/E’s”) below 14x, you may consider Walmart Inc. (NYSE:WMT[1]) as a stock to avoid entirely with its 27.9x P/E ratio. Nonetheless, we’d need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E. Recent times have been advantageous for Walmart as its earnings have been rising faster than most other companies.

It seems that many are expecting the strong earnings performance to persist, which has raised the P/E. You’d really hope so, otherwise you’re paying a pretty hefty price for no particular reason. See our latest analysis for Walmart[2]

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Keen to find out how analysts think Walmart’s future stacks up against the industry?

In that case, our free report is a great place to start[3].

Does Growth Match The High P/E?

There’s an inherent assumption that a company should far outperform the market for P/E ratios like Walmart’s to be considered reasonable. If we review the last year of earnings growth, the company posted a terrific increase of 41%. As a result, it also grew EPS by 15% in total over the last three years.

Accordingly, shareholders would have probably been satisfied with the medium-term rates of earnings growth. Shifting to the future, estimates from the analysts covering the company suggest earnings should grow by 13% per year over the next three years. With the market only predicted to deliver 9.2% each year, the company is positioned for a stronger earnings result.

In light of this, it’s understandable that Walmart’s P/E sits above the majority of other companies. Apparently shareholders aren’t keen to offload something that is potentially eyeing a more prosperous future.

The Final Word

We’d say the price-to-earnings ratio’s power isn’t primarily as a valuation instrument but rather to gauge current investor sentiment and future expectations. As we suspected, our examination of Walmart’s analyst forecasts revealed that its superior earnings outlook is contributing to its high P/E.

At this stage investors feel the potential for a deterioration in earnings isn’t great enough to justify a lower P/E ratio. Unless these conditions change, they will continue to provide strong support to the share price.
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Before you settle on your opinion, we’ve discovered 2 warning signs for Walmart[4] that you should be aware of. Of course, you might find a fantastic investment by looking at a few good candidates. So take a peek at this free list of companies with a strong growth track record, trading on a P/E below 20x.[5] Have feedback on this article?

Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.[6] This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data.

Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

Simply Wall St has no position in any stocks mentioned.

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References

  1. ^ NYSE:WMT (simplywall.st)
  2. ^ See our latest analysis for Walmart (simplywall.st)
  3. ^ free report is a great place to start (simplywall.st)
  4. ^ 2 warning signs for Walmart (simplywall.st)
  5. ^ list of companies with a strong growth track record, trading on a P/E below 20x. (simplywall.st)
  6. ^ Get in touch (feedback.simplywall.st)
  7. ^ Sign up here (investor-research.typeform.com)