Shop these stocks this holiday season

Bargain hunter are counting down days to one of the biggest shopping bonanzas of the year, Black Friday, a precursor to a flurry of holiday haul that culminates in the Boxing Day blowout. Supported by strong consumer spending figures, holiday sales are projected to ring up more than US$1.1 trillion in sales, according to research firm eMarketer. A Deloitte study shows the average U.S. shopper is expected to spend US$1,496 this holiday season.

It’s reasonable, therefore, to assume that leading retail and travel services are set to witness a sizeable revenue bump driven by solid holiday sales.  Not surprisingly, these businesses are doing everything to get consumers to log in or line up. Offers range from same-day delivery to free shipping and doorbuster deals on some of the hottest devices and destinations on consumers' annual wish list.

These well-funded and industry-leading businesses are well positioned to capitalize on the annual shopping jamboree. Two of them are trading at a discount to our fair value estimates, while one is overpriced – savvy investors could potentially add these companies to their watchlists: 

America’s largest retailer by sales, Walmart (WMT) operates over 11,300 stores selling general merchandise and groceries. The U.S. market accounts for three-quarters of its sale while the rest coming from Mexico and Central America (6%), the U.K. (6%), and Canada (4%). Apart from its eponymous site, the firm operates several e-commerce properties including Flipkart, Jet.com, and shoes.com, and owns 10% stake in Chinese online retailer JD.com. E-commerce represents about 5% of its annual sales.

The grocery behemoth is pushing hard as it competes with Amazon to win over shoppers by boosting e-commerce offerings and services, faster delivery, and store pick up option for online orders, among others. “Walmart is the only American retailer that can compete comprehensively with Amazon’s retail offering,” says Morningstar equity analyst, Zain Akbari, who recently raised the stock’s fair value from US$94 to US$101.

Despite operating in an intensely competitive retail environment, Walmart’s cost leverage that keep prices low should help it compete aggressively, “particularly for the roughly 50 million households [that] do not subscribe to Amazon Prime,” adds Akbari.

Walmart's third-quarter earnings handily topped most Wall Street analysts' forecasts and raised its guidance for the full year. Its e-commerce sales in the U.S. jumped 41% from a year earlier, reinforced by the grocery business. The company’s stock has been on a tear this year, having rallied more than 27% for the year to date, as of Nov. 15, and is widely expected to carry the momentum through the holiday season.
 

One of highest-grossing online retailers worldwide, Amazon (AMZN) clocked a staggering US$233 billion in sales in 2018. Online product and digital media sales account for more than half of the firm’s annual revenue.

Regarded as the biggest disruptor of the retail industry, Amazon continues to push into new segments and find ways to evolve its business model. “Its operational efficiency, network effect, and a brand intangible asset built on customer service provide it with sustainable competitive advantages that few, if any, traditional retailers can match,” says a Morningstar equity report.

Last year, Americans spent a whopping US$7.9 billion online on Cyber Monday, making it the largest digital shopping day of all time in the U.S., in addition to spending US$3.7 billion on Thanksgiving and another US$6.2 billion on Black Friday, according to Adobe Analytics. Amazon was one of the biggest beneficiaries of this windfall, registering its biggest shopping day in history on Cyber Monday.

“The combination of competitive pricing, unparalleled logistics capabilities and speed, and high-level customer service makes Amazon an increasingly vital distribution channel for consumer brands,” says Akbari, who puts the stock’s fair value at US$2,300.

The internet retail giant continues to outpace global e-commerce trends as it gains share while fortifying its network effect. “On top of its impressive growth, Amazon is building a more visible margin expansion story despite investment requirements for Prime one-day shipping, content deals, AmazonFresh, hardware such as the Echo/Alexa-enabled products, and new delivery technologies,” says Akbari, who projects 20% revenue growth for 2019, and 16% annually thereafter through 2023.

The world’s largest online travel agency by bookings, Expedia (EXPE) offers services for lodging (69% of 2018 sales), air tickets (8%), rental cars, cruises, in-destination, and other (14%), and advertising revenue (9%). Expedia’s bouquet of brands includes Expedia.com, Hotels.com, Travelocity, Orbitz, and AirAsia, among others. The company forayed into travel media after acquiring Trivago. Transaction fees for online bookings account for the bulk of sales and profits.

Expedia, which has already kicked off its holiday season sale, boasts a strong network effect which has helped it corner 35% to 40% share of the global online travel agency booking market.

The firm’s investments into international markets and vacation rentals in 2019 and 2020 will support its network advantage, providing a narrow moat. “Expedia has built a leading network of online travel services, which has driven a strong user base,” says a Morningstar equity report, adding that this network effect could remain over the next decade.

The company is preparing to counter the headwinds from the consolidation in U.S. markets by expanding its international presence. Expedia is partnering with local players in emerging markets to boost growth. Its partnership with Chinese online travel agency CTrip (CTRP) is particularly “crucial, as China will contribute around 30% of industry online booking growth over the next five years,” says Morningstar equity analyst, Dan Wasiolek, who forecasts Expedia’s global share of the total travel booking market to rise from 5.9% in 2018 to 6.8% in 2023. Prompted by Expedia's third-quarter results and elevated competition from Google, Wasiolek recently lowered the stock’s fair value from US$185 to US$170.