On Thursday, Bank of America (BofA) made a strategic addition to its prestigious US 1 List by including Walmart Inc. (NYSE:WMT), signaling confidence in the retail giant's growth prospects.
The firm highlighted Walmart's ability to gain market share broadly, the expansion of its digital advertising, and the growth of other high-margin ancillary businesses. Additionally, Walmart's efforts to reduce ecommerce losses were cited as reasons for the optimistic outlook.
The inclusion on the US 1 List suggests that Bank of America sees Walmart as a strong investment opportunity, particularly noting the company's diverse strategies to continue its upward trajectory. While Walmart receives this vote of confidence, Costco Wholesale Corporation (NASDAQ:COST) was simultaneously removed from the list. Although BofA reaffirmed its Buy rating on Costco, it expressed concerns over the potential for further price-to-earnings (P/E) ratio expansion.
Costco's current P/E ratio stands at an all-time high of approximately 50 times, as shown in Exhibit 3 of the analyst's report. This valuation comes amid challenging comparisons with peers, the possibility of competitive responses to Costco's market share gains, including in the appliance sector, and the aftermath of a membership fee hike. The fee increase, which went into effect on September 1, is now considered a past event, and its contribution to earnings per share (EPS) may be limited as Costco plans to reinvest in its business, including in pricing and wages.
Bank of America's reshuffling of its US 1 List reflects a strategic assessment of the retail sector, taking into account the financial performance and market conditions affecting these leading retail companies. Walmart's addition to the list is a response to the company's solid performance and strategic initiatives that are expected to drive continued success.
On the other hand, Costco's removal, despite a strong Buy rating, indicates a cautious approach to its current high valuation and the factors that might constrain its earnings growth potential.
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