Does Wal-Mart Have a Bright Future?

With shares of Wal-Mart (NYSE:WMT) trading around $76, is WMT an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Wal-Mart operates retail stores in various formats around the world. The company aims to price items at the lowest price every day. Wal-Mart operates in three business segments: the Walmart U.S. segment, the Walmart international segment, and the Sam’s Club segment. It manages retail stores, restaurants, discount stores, supermarkets, supercenters, hypermarkets, warehouse clubs, apparel stores, Sam’s Clubs, neighborhood markets, and other small formats, as well as Walmart.com and SamsClub.com. Through its retail channels, Wal-Mart is able to provide a variety of products and services at affordable prices to consumers and companies worldwide.

Wal-Mart is replacing the chief of its U.S. discount stores in what could be an indication that it’s losing confidence that its largest business unit will rebound after more than a year of disappointing results. Greg Foran, 53, who was promoted to president and CEO of Wal-Mart Asia earlier this year, will succeed Bill Simon, who had been CEO of Wal-Mart’s U.S. stores for four years, effective Aug. 9. The move, which was announced Thursday, marks the company’s biggest management shake-up since Doug McMillon took over as CEO of Wal-Mart Stores in February. Foran will report directly to McMillon. Simon’s departure isn’t surprising. He has been considered a top candidate for the critical job at the Bentonville, Arkansas-based retailer. But some analysts think the timing of Simon’s resignation was odd. Wal-Mart, which reports second-quarter earnings results next month, is heading into the two biggest shopping periods of the year: the back-to-school and winter holiday seasons.

“A decision to replace a high-ranking leader of a major retailer before back-to-school and before holidays speaks volumes,” said Brian Sozzi, CEO of Belus Capital Advisors. “McMillon is starting to clean house and pick executives who will move quicker.” Wal-Mart declined to make either Simon or Foran available for interviews on Thursday after the announcement. But Wal-Mart spokesman Dave Tovar told The Associated Press that Simon’s resignation was mutual. He said that Simon and McMillon have been having ongoing discussions about Simon’s departure. On July 18, Simon officially agreed to retire. In response to the timing of the resignation, Tovar said merchandise for the back-to-school and the holiday seasons have already been ordered. “This will give an opportunity for Greg to look at the plan and see if there are any other suggestions for making it better,” said Tovar, who added that Foran will be taking over the U.S. discount business at a time when the company evaluates its future budget and strategy planning, a three-month period that ends in September.

T = Technicals on the Stock Chart are Mixed

Wal-Mart stock has seen its fair share of volatility over the last couple of years. The stock is currently pulling back and may need time to consolidate. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Wal-Mart is trading between its rising key averages which signal neutral price action in the near-term.

WMT

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Wal-Mart options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Wal-Mart options

13.77%

30%

28%

What does this mean? This means that investors or traders are buying a minimal amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Average

Average

September Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a minimal amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Wal-Mart’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Wal-Mart look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-2.63%

-18.56%

5.56%

5.93%

Revenue Growth (Y-O-Y)

0.78%

1.51%

1.66%

1.68%

Earnings Reaction

-2.42%

-1.77%

0.22%

-2.6%

Wal-Mart has seen mixed earnings and increasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Wal-Mart’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Wal-Mart stock done relative to its peers, Target (NYSE:TGT), Costco (NASDAQ:COST), Kohl’s (NYSE:KSS), and sector?

Wal-Mart

Target

Costco

Kohl’s

Sector

Year-to-Date Return

-2.16%

-4.00%

-1.19%

-8.68%

-3.00%

Wal-Mart has been a relative performance leader, year-to-date.

Conclusion

Wal-Mart is a retail company that provides a variety of products and services to consumers and companies worldwide. Greg Foran, 53 will succeed Bill Simon, who had been CEO of Wal-Mart’s U.S. stores for four years, effective Aug. 9. The stock has seen its fair share of volatility and is currently pulling back. Over the last four quarters, earnings have been mixed while revenues have been increasing, which has produced conflicting feelings among investors. Relative to its peers and sector, Wal-Mart has been a relative year-to-date performance leader. WAIT AND SEE what Wal-Mart does this quarter.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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