Three Reasons to Buy Walmart Stock

Wal-Mart (NYSE: WMT)Maybe it's a stock you never thought of in your portfolio. For all intents and purposes, this retail giant has a reputation for being boring. After all, it's in a mature industry with low margins and slow growth.

Retailers are lucky to turn 5% of sales into a profit after incurring significant expenses. In contrast, tech giants typically have profit margins as high as 30% of sales.

But don't dismiss Wal-Mart as a potentially superior long-term holder. The retailer's exposure is far less than that of many of its high-growth stock market peers. And it's likely to improve profitability over the next few years. All of this, and in just a few short years, its valuation may look as if it's not quite right.

1. The Leader's Goodness

In any industry, market leadership brings benefits to the leader, and Walmart is clearly benefiting from this competitive advantage. Throughout the holiday shopping season, Wal-Mart chain store sales grew at a phenomenal rate, both in-store and through the online channel.

Comparable store sales grew 41 TP3T in the fourth quarter, compared to 81 TP3T in the same period last year, a performance that easily outpacedKroger (math.) andTargetWal-Mart's market share has grown in both the food and general merchandise segments. In fact, Wal-Mart gained market share in both the food-cargo and general merchandise segments.

Several factors contributed to this success, but the biggest driver was Wal-Mart's pricing advantage. Its large model allows it to sell at a lower price than its peers, which is valuable in any sales environment, but especially useful when consumers want to keep costs down.

Driven by this success, Walmart is poised for even greater gains." Dough McMillon, chief executive officer, said in late February, "We ...... are pleased to continue our good momentum and efforts to lower prices for our customers.

2. Expanding profitability is good

Walmart isn't known for its impressive profit margins, but the chain's profitability is improving. Last year, Wal-Mart's operating income surged, and it's expected to outpace revenue again by 2024. At the same time, the company is cutting prices at the same time as strong sales growth, which is good news for the business.

This is largely due to the retailer's push into the tech niche. For example, its e-commerce sales jumped 20% last year, topping $100 billion.

Meanwhile, Walmart is also investing in the曏 digital advertising business, having just acquired Visio for $2.3 billion, and investors can see some early signs of success here, as margins have risen a full percentage point to 4.2% of sales.

3. I am glad to see that a name is available at a good price.

Walmart's margins are still far from the 6% that investors saw in 2015, when Walmart hadn't started investing heavily in its omnichannel retail platform. On the other hand, Walmart has a couple of more attractive growth paths that it didn't have at the time, such as e-commerce and digital advertising.

In total, if you believe that this retailer can maintain its strong growth momentum while improving its margins to 6% levels, then its shares are now trading like a "steal". The stock currently trades at 0.7 times annual sales, which is at the high end (but not the top) of the premium range investors have seen over the past five years.

Target's costs are the same as Wal-Mart's, but it does not have the same market share as Wal-Mart. Investors should look at Wal-Mart as a good option for stability and faster earnings growth.

Should you invest $1,000 in Walmart now?

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Demitri Kalogeropoulos does not own any of the stocks mentioned above.The Motley Fool recommends Target and Wal-Mart for its positions.The Motley Fool recommends Kroger.The Motley Fool has a disclosure policy.

3 Reasons to Buy Walmart Stock Like There's No Tomorrow was originally published by The Motley Fool.