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Goldman Sachs upgrades Wal-Mart to buy

Goldman Sachs Group Inc. upgraded Wal-Mart Stores Inc. to "buy" from "neutral" on the retailer's ability to compete with online players, according to a research note July 14.

Goldman Sachs raised its 12-month price target for Walmart to $84 from $78 and raised its downside relative price-to-earnings assumption to 88% from 82%.

"We believe that the company is as well positioned as any mass market retailer – in an admittedly imperfect world for mass market retailers – to cope with increasing demands on e-commerce and technology spend, weather [Amazon.com Inc.]'s growth and its increased focus on consumables, and maintain its franchise," the analysts said in the note.

The analysts said they chose to upgrade Wal-Mart because of the retailer's positioning in rural markets, its heavy grocery concentration and its scale. Only 35% of Wal-Mart's stores are in the largest 40 metropolitan statistical areas in the country, and 22% are in markets with fewer than 100,000 residents, a better ratio than Wal-Mart's general merchandiser competitors, according to data from the research note.

"These rural areas are more likely to remain brick and mortar oriented given the lack of density for optimal delivery economics," the analysts said in the note.

Wal-Mart's scale makes addressing challenges from Amazon and other online retailers more feasible, as it allows the company to invest in e-commerce platforms and in technology that can help with delivery logistics, the analysts said.

Risks to the company include competition from Amazon, which offers convenience through its online platform, and from discounters whose sharp price cuts could eat into Wal-Mart's market. The analysts also pointed out Wal-Mart's limited tools in data collection compared to rivals like Target Corp., whose "Red Card" program helps the company garner data.