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, super centers, 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.

In Wal-Mart’s desire to become America’s top beer retailer, it has been selling Budweiser, Coors, and other brands almost at cost in some stores. Internal documents seen by Bloomberg indicated that the markup on a 36-pack of Coors Light cans at a Los Angeles-area store came to 0.6 percent versus 16.2 percent for a package of Flaming Hot Cheetos. Retailers rarely divulge data regarding markups, so the March data allow an unusual glimpse of Wal-Mart’s alcohol pricing strategy. The giant retailer’s move into beer is part of a plan to double alcohol sales by 2016 and grab a bigger piece of the domestic beer market, which is worth around $45 billion.

T = Technicals on the Stock Chart Are Mixed

Wal-Mart stock has made solid progress in the last couple of years. The stock has been trading sideways for most of this year and is now trading near yearly mid-prices. 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 key averages, which signals neutral price action in the near-term.

WMT

Source: Thinkorswim

Taking a look at the implied volatility 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

14.58%

23%

21%

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

October Options

Flat

Average

November Options

Flat

Average

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

E = Earnings Are Rising 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?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

5.93%

4.59%

11.14%

12.50%

Revenue Growth (Y-O-Y)

1.68%

1.04%

3.86%

3.36%

Earnings Reaction

-2.60%

-1.70%

1.51%

-3.63%

Wal-Mart has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have expected more from Wal-Mart’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

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

Wal-Mart

Target

Costco

Kohl’s

Sector

Year-to-Date Return

11.56%

8.71%

19.28%

21.10%

17.63%

Wal-Mart has been an average relative performer, year-to-date.

Conclusion

Wal-Mart is a retail company that provides a variety of products and services to consumers and companies worldwide. It looks like the company is attempting to gain a larger portion of the alcohol market share, as it has been cutting prices to near cost. The stock has made positive progress in the last couple of years but is now trading sideways as it consolidates after a recent run. Over the last four quarters, earnings and revenues have been rising. However, investors have grown to expect more from the company. Relative to its peers and sector, Wal-Mart has been an average year-to-date performer. WAIT AND SEE what Wal-Mart does this coming quarter.

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