After you receive this alert, we will be initiating a position in Walmart (WMT) , buying 400 shares at roughly $144.81. Following the trade, WMT will represent 1.76% of the portfolio.
Following our exits from (PEP) and (JNJ) Wednesday, here, we have some room in our portfolio and cash ready to redeploy. Given PepsiCo's more defensive nature, we find it appropriate to fill the space with a consumer staple that can hold its own in the face of rising coronavirus cases. And while the Presidential election may be dominating the market's attention and news flow at the moment, it is important to remember that the moment a winner is officially announced, focus may return to the virus, which yesterday saw record daily new cases of over 121,000.
When looking for a new position, we want a name that is both defensive and resilient to the potential for stricter modified lockdown mandates that may result from a Biden presidency, but also we want to invest in a company that is rapidly transforming itself for the new post-pandemic world, where we believe initiatives such as online shopping will be crucial to longer-term success. This is where Walmart comes into play.
On the defensive side, as we noted in our bullpen alert, here, Walmart stands to benefit from a modified type of lockdown because they sell groceries, offer fast delivery, and most importantly, can maintain a safe shopping environment, all the while benefiting from another round of stimulus as consumers spend their dollars at everyday low price retailers. However, another retailer in our portfolio, TJX Companies (TJX) , would see its business materially impacted by either another lockdown or tighter mobility restrictions. Our concerns there is what played into our decision to cut our position by one-third this morning in our Alert here. That's why we are using some of the excess cash from that previous sale to fund this new initiation
On the offensive side, we believe Walmart's e-Commerce investments, which really started over four years ago with the acquisition of Jet.com (though that site has since been closed down - and if you search for Jet.com, you'll be taken to Walmart.com) have been paying off now more than ever as the company's U.S. e-Commerce operation grew 97% in the second quarter - helping the U.S. operation overall.
Additionally, we believe Walmart to perhaps be one of, if not the only traditionally brick and mortar retailer to be capable of competing with Amazon (AMZN) and indeed, they have ongoing initiatives that Amazon users may recognize such as Walmart+, the company's answer to Amazon Prime, where membership costs $12.95/month or $98/year and provides members special benefits such as free shipping, specials on fuel, and more.
Moreover, though it's far from finalized (call it an embedded call option), we believe that should help the company close a deal with TikTok Global, where it can greatly aid the online segment's growth as it provides the company, which has already joined forces with Shopify (SHOP) , to "expand its e-Commerce marketplace to more small businesses", an Instagram like play with the ability to leverage online influencers. All of these initiatives, though small speak to a company that has no intention of standing by idly while Amazon pushes deeper into its brick and mortar territory (with Amazon branded stores and the prior acquisition of Whole Foods).
Lastly, on the international front, we believe that in addition to China, India represents one of the greatest growing emerging market opportunities on the planet thanks to its 1.3+ billion person population, rapidly growing GDP and quickly expanding middle class - all of which sums up to a surge in discretionary income and therefore consumerism over the next decade. Walmart will be able to take advantage of this thanks to its majority ownership of Flipkart, the dominant e-Commerce marketplace in India - with Amazon India a close second - we weren't kidding about that rivalry. And while the deal has faced some regulatory issues in the past, we believe these issues have been and are adequately being addressed as earlier this year, Flipkart acquired 100% ownership of Walmart India Private Limited. With that acquisition, Flipkart also announced the launch of Flipkart Wholesale, "a new digital marketplace that will help transform India's retail ecosystem by leveraging cutting-edge and locally developed extensive leadership in the consumer e-commerce segment and technology for the country's mom-and-pop 'kirana' grocery stores and other small retailers." In other words, Walmart is doing what is necessary to both grow its business in India and assist local business, something that is sure to help on the regulatory front.
One more area of growth we would be remiss not to call out is advertising. Though it is small and largely flying under the radar at the moment, analysts at Cowen commented that Walmart "is well positioned to accelerate its digital ad biz & drive upside to e-Commerce profitability." Adding that the company "can achieve differentiation by leveraging omni scale & measuring customer interactions & transactions." Ultimately Cowen believes this business can grow to over $3.4 billion in sales by FY2020 and represent "1.8% share of the digital ad market" and 5% of earnings.
For all of these reasons, we believe that despite this year's gains, Walmart has plenty of room to run both during and after the pandemic. Lastly, we want to note that while we had considered Target (TGT) , which is certainly more attractive an earnings based valuation and growth rates (though off of a much smaller basis of course), we simply believe Walmart to have much more optionality when it comes to opening up new areas of growth - Walmart+, Flipkart, etc. - more scale and again, the only name that effectively competes at Amazon's level on the commerce and advertising fronts - and therefore justifies its premium valuation versus Target.
We are initiating the position with a $160 price target, representing roughly 28.5x FY2022 earnings estimates, a slight premium to the historical valuation given the initiatives noted above as well as the market share gain opportunity resulting from the pandemic.