Bank of America Analysts Add Walmart to US-1 List

Bank of America analysts added Walmart (NYSE:WMT) to their US-1 list on Thursday, citing strong share gains, growth in high-margin ancillary businesses, and improved e-commerce performance.

At the same time, Costco (NASDAQ:COST) was removed, although the firm maintains its Buy rating on the stock, noting potential limits to further multiple expansion.

BofA said Walmart is benefitting from "broad-based share gains" across product categories and income cohorts, particularly among higher-income consumers. Its omni-channel strategy, including expanded online offerings, remodels, and Walmart+ membership growth, supports its strong positioning. These gains are expected to continue.

For the holiday season, the bank notes that Walmart's digital capabilities are expected to thrive, driven by increased online spending.

They add that the retailer’s growing digital advertising business has significantly bolstered margins.

"We see continued gross margin expansion for WMT as growth in higher-margin ancillary businesses (which drove ~half of F3Q’s +$500mn y/y EBIT gain and now represent ~one-third of total EBIT) incl. digital advertising, 3P marketplace fees and fulfillment services help offset sales mix headwinds as general merchandise continues to lag the lower-margin grocery and health/wellness categories,” states BofA.

Additionally, Walmart is said to have made strides in reducing U.S. e-commerce losses, with net delivery costs per order down 40% year-over-year.

While Walmart's current valuation of 33-34x earnings exceeds historical averages, BofA analysts believe its ongoing transformation justifies this premium.

They believe that Walmart’s digital evolution and margin improvements position it for sustained profitability and potential multiple expansion.

Meanwhile, the bank says Costco remains a solid performer but faces challenges from tough comparisons, competitor responses, and limited EPS gains following its recent membership fee increase.

With its P/E at an all-time high of ~50x, BofA sees less room for further valuation growth relative to Walmart.