Is Wal-Mart Stock Ready for Competition?

With shares of Wal-Mart (NYSE:WMT) trading around $74, 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.

Wal-Mart may see increased competition as talks of the upcoming Alibaba IPO continue to heat-up. Alibaba has some big plans aside from the Chinese e-commerce giant’s upcoming IPO. Alibaba is planning to invest $16 billion between now and 2020 to build out its infrastructure, with the goal of reaching millions of consumers in China’s interior. Reuters reports that about $15 billion will come from the company’s IPO, which has been rumored to take place in the U.S. Alibaba Chief Executive Jonathan Lu told Reuters that he expects the company’s transactions to reach $490 billion by 2016, which will top Wal-Mart, making Alibaba the largest retailer in the world.

T = Technicals on the Stock Chart Are Mixed

Wal-Mart stock has made positive progress in recent quarters. However, the stock is currently pulling-back from highs for the year so it may need time to stabilize. 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 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

19.57%

86%

83%

What does this mean? This means that investors or traders are buying a very significant 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

Steep

Average

November Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish 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 Increasing 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 increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been disappointed with Wal-Mart’s recent earnings announcements.

P = Weak 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

8.91%

7.12%

17.32%

20.54%

13.24%

Wal-Mart has been a weak 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 international competition may be on the rise as Alibaba looks poised for growth. The stock has made some progress in recent quarters but has been pulling back lately. Over the last four quarters, earnings and revenues have been increasing, however, investors have been disappointed about what they have heard during earnings announcements. Relative to its peers and sector, Wal-Mart has been a weak year-to-date performer. WAIT AND SEE what Wal-Mart does this coming quarter.

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