Wal-Mart Stores Inc is now threatening Amazon.com, Inc.

It has been a challenging year for many U.S. retail companies, but Wal-Mart Stores Inc (NYSE: WMT) has risen to the occasion. On Tuesday, Citi analyst upgraded Walmart to "buy" and said investors should expect more of the same from the stock in 2018.

Walmart's stock has gained 43 percent year-to-date, more than double the return of the overall market. However, while investors have obsessed over identifying which retail companies are threatened by Amazon.com, Inc. (AMZN), McShane says Walmart has stealthily become a threat to Amazon.

[See: 7 of the Best Blue-Chip Stocks to Buy for 2018.]

"Our belief [is] that its aggressive omni-channel strategy will continue to drive significant sales growth, and WMT's e-commerce operations are emerging as a true challenger to Amazon, both factors that could fuel further multiple expansion," McShane says.

McShane says Walmart is well-positioned to defend its grocery business given its low prices, physical store footprint and increasingly integrated online platform. She says consensus earnings and margins estimates are currently too low, particularly for the second half of 2018. 

RELATED: Check out all the major retailers that have filed for bankruptcy in 2017: 

Retailers that filed for bankruptcy in 2017
See Gallery
Retailers that filed for bankruptcy in 2017

Gordmans Stores

REUTERS/Rick Wilking

Gander Mountain


General Wireless Operations (formerly RadioShack)



Photographer: Daniel Acker/Bloomberg via Getty Images

BCBG Max Azria

(Photo by Rob Kim/FilmMagic)

MC Sports


Eastern Outfitters


Wet Seal

(Photo by Justin Sullivan/Getty Images)

The Limited

(Photo by Jb Reed/Bloomberg via Getty Images)


Photographer: David Paul Morris/Bloomberg via Getty Images



Looking ahead to Walmart's fourth-quarter earnings expected in February, Citi estimates the company will report in-line earnings per share of $1.38. However, Citi says Walmart will surprise to the upside with same-store sales growth of 2.5 percent compared to consensus estimates of 1.9 percent growth. In the most recent quarter, Walmart reported 50 percent year-over-year growth in online sales.

Citi is also anticipating Walmart will increase its dividend payout from its current yield of 2 percent following U.S. tax reform.

[See: 7 of the Best Stocks to Buy for 2018.]

McShane's optimism about Walmart's 2018 extends to the rest of the U.S. retail sector as well. She says retailers are starting to recognize just how much of an asset a physical store can be and are attempting to leverage that asset by remodeling stores and focusing on differentiating themselves from Amazon.

"After years of concern about secular competition from Amazon and other online-only retailers, we think fears could start to subside in a meaningful way in 2018," McShane says.

McShane says O'Reilly Automotive Inc (ORLY) is Citi's top stock pick in the hardline retail space, but Walmart is a close second.

In addition to the "buy" rating, Citi has a $117 price target for Walmart stock.

Copyright 2017 U.S. News & World Report

Read Full Story