Wal-Mart shares to rally 23 percent in the next 12 months on strong e-commerce growth, Bank of America says

Published Wed, Feb 22 201711:32 AM EST

Bank of America Merrill Lynch on Wednesday upgraded Wal-Mart to buy from neutral, citing the potential for the U.S. retailer to continue to deliver double-digit growth in its e-commerce business. "We believe WMT is embarking on a period of sustainable 20-30%+ e-com growth," equity analyst Robert Ohmes wrote in a research note. On Tuesday, Wal-Mart reported fiscal fourth-quarter earnings that exceeded analysts' expectations driven by a 29 percent rise in U.S. e-commerce sales and a 36 percent increase in gross merchandise volume. Bank of America says last quarter GMV growth for "Walmart Grocery," Wal-Mart's grocery app and website, outpaced GMV growth for "Amazon Fresh," Amazon 's grocery delivery service, another encouraging sign that Wal-Mart's online strategy is paying off. Apart from Wal-Mart's initiatives to emerge as a digital enterprise, Bank of America says "strong traffic" at brick-and-mortar stores should also support earnings growth ahead. "We believe WMT's solid U.S. comp and improving e-commerce sales momentum will continue in F18E [fiscal 2018]," Ohmes said. Last quarter, same-store sales rose 1.8 percent compared with consensus expectations for 1.3 percent, despite what Bank of America calls a "very tough retail environment." As a result, analysts at the investment bank say multiple expansion is on the way, which could lift the shares to $88 over the next 12 months, implying a gain of 23 percent from Tuesday's close. "We believe WMT's two-year forward P/E multiple should continue to rise from current 15-16x levels and towards our 19-20x target as e-com success increases and WMT's recent e-com acquisitions go into the U.S. comp," Ohmes said in reference to Wal-Mart's $3 billion acquisition of Jet.com last year, among others. This month, shares of Wal-Mart are already up 8 percent compared with a gain of more than 3.5 percent for the S & P 500 and an increase of 4.4 percent for the S & P consumer staples sector. Wal-Mart, 1 year Source: FactSet Bank of America says Wal-Mart could also emerge as a winner from potential changes in tax law under Donald Trump's administration. "We believe that WMT could perform relatively well under certain border adjustment tax scenarios given that WMT's low-cost leadership could support market share gains as consumers become more value conscious in an inflationary environment," Ohmes wrote. — CNBC's Michael Bloom contributed to this story.

Employees assist shoppers at the check out counter of a Walmart store in Los Angeles.

Patrick T. Fallon | Bloomberg | Getty Images

Bank of America Merrill Lynch on Wednesday upgraded Wal-Mart to buy from neutral, citing the potential for the U.S. retailer to continue to deliver double-digit growth in its e-commerce business.

"We believe WMT is embarking on a period of sustainable 20-30%+ e-com growth," equity analyst Robert Ohmes wrote in a research note.

On Tuesday, Wal-Mart reported fiscal fourth-quarter earnings that exceeded analysts' expectations driven by a 29 percent rise in U.S. e-commerce sales and a 36 percent increase in gross merchandise volume.

Bank of America says last quarter GMV growth for "Walmart Grocery," Wal-Mart's grocery app and website, outpaced GMV growth for "Amazon Fresh," Amazon's grocery delivery service, another encouraging sign that Wal-Mart's online strategy is paying off.