10 reasons to buy Wal-Mart right now, according to Jefferies

Shoppers at a Walmart store in Los Angeles.
Jonathan Alcorn | Reuters

Wal-Mart shares are up 16 percent so far this year, but one analyst says the stock has more room to run, and he cited 10 reasons to support his position.

After the company's annual shareholder meeting in Fayetteville, Arkansas, last week, Jefferies analyst Daniel Binder on Monday upgraded the retailer's shares to "buy" from "hold," saying changes at the world's largest retailer are starting to take hold. He likewise lifted the price target to $82 from $60 for the company's stock, on the premise that further opportunity lies ahead. Wal-Mart shares were recently trading around $71.

"Based on our store checks and survey work, we believe Wal-Mart's store investments are yielding broadly improved store conditions and first-quarter sales results seem to confirm this," he told investors. "We think this improvement will be longer lasting and should lead to upside in sales and an upward earnings per share revision cycle."

However, not every analyst came away from Wal-Mart's meeting with such robust confidence. In a separate note to investors Monday, Cowen & Company analyst Oliver Chen reiterated that he needs to see more evidence of a sustained turnaround before he would upgrade the company's shares from his current "market perform" rating.

As for Binder, here are the top 10 reasons why Wal-Mart stock is a buy.

1. Its investments are bearing fruit

The dedication of $2.7 billion toward training employees and paying them higher wages; putting money toward its online operations; and cleaning up its stores are all driving sales momentum. But Binder said they could contribute to an even bigger top-line lift moving forward.

Wal-Mart's new strategies

At the company's annual shareholder meeting last week, management said its investments have helped the retailer log higher customer service scores year over year for the past 79 weeks.

2. Lower prices should power sales

Wal-Mart said last month that it would accelerate its timeline for investing its own money into lower prices for shoppers. Although the retailer has not outlined exactly how or on which products it will lower prices, the move could help power its comparable sales "up another level," Binder said.

In turn, that could position the retailer to better leverage its expenses, thereby allowing it to invest further into this strategy.

3. Better inventory management is boosting the bottom line

Wal-Mart has emphasized the importance of keeping its merchandise in stock for shoppers, while at the same time keeping fewer goods on hand. It's doing so, Jefferies said, by "cleaning out the backroom" so that more of its product goes right from the warehouse to the shelves.

This has helped cut down on supply chain costs, and has reduced the number of markdowns the company has needed to take, Binder said.

4. Grocery, grocery, grocery

Groceries account for more than half of Wal-Mart's revenue, so it's no surprise the category was a key focus at the retailer's meeting with shareholders. According to Jefferies, sourcing in this category has improved, which has resulted in higher-quality fresh goods on shelves.

The retailer's rollout of its online grocery service, which allows shoppers to place their orders online and have them delivered to their vehicle, should also help Wal-Mart grab share, Jefferies said.

At the company's meeting in Arkansas, management said more than 90 percent of its online grocery shoppers are repeat customers. The retailer also announced that it would roll out online grocery at 14 more markets this month, making it available in more than 50 markets by the end of June.

5. It's keeping its store count in check

Wal-Mart's decision to shutter all 102 of its small Walmart Express stores, along with slower growth of its domestic fleet, is making its stores more productive. This approach should also continue to boost the company's sales per square foot in the U.S., Jefferies said.

Wal-Mart hosts shareholders

Speaking at its shareholder event last week, CEO Doug McMillon told analysts that the company hasn't entered a new market in a long time, and does not feel the need to expand its footprint to additional markets.

6. Expenses are about to drop off

The company will invest $1.5 billion in wages this year, following last year's $1.2 billion commitment. According to Jefferies, these investments accounted for 75 percent of the retailer's expected decrease in earnings per share, and should peak this year.

To be sure, a new rule regarding overtime pay, along with investments in digital operations and prices, will weigh on its bottom line. However, CFO Brett Biggs told analysts that expense management will continue to be a big focus moving forward.

7. Sentiment around the stock is improving...

Earnings per share estimates for Wal-Mart have been taken down for more than two years, including a sharp drop after its meeting with analysts in October, Jefferies said. Though these estimates have picked up slightly since Wal-Mart's first-quarter earnings beat, Jefferies expects more of a lift to come.

Wal-Mart didn't raise its annual forecast after its first-quarter results. Binder said he would "not be surprised" if its second-quarter report leads to an upward revision. The company did not comment on current sales trends at its shareholder meeting.

8. ... but expectations aren't too high

Though shares are up more than 30 percent since its November lows, Wal-Mart's stock price is still down nearly 3 percent over the past year.

9. Low-income shoppers are finally in better shape

Wal-Mart's bargain-focused shopper is starting to feel some relief, as increases in the minimum wage in some states have helped lower-income households experience better-than-average wage improvements, Jefferies said.

After its most recent earnings report, management added that Wal-Mart workers are also spending more in its stores, following their wage increases.

10. There's opportunity for institutional ownership

Ownership of Wal-Mart stock by hedge funds and other institutional investors hit a 10-year low in December, and remains near 30 percent, Jefferies said. If major investors become believers in the company's turnaround, it could push its share price higher.

Disclosure: As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives compensation based in part on the overall performance of the firm, including investment banking income.