What Will Wal-Mart Do Post-Earnings?

With shares of Wal-Mart (NYSE:WMT) trading around $73, 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 Stores’ new Chief Executive Doug McMillon, in his first earnings call since taking the helm of the world’s largest retailer on February 1, said he’ll accelerate openings of its better-performing smaller-format stores and signaling other changes to come as the company issued another disappointing outlook for the first-quarter and for the year. Any possible changes will be closely watched as Wal-Mart’s fourth-quarter same-store sales at its namesake U.S. unit, the bulk of its business, and a key investor focus dropped for a fourth straight quarter.

Wal-Mart blamed a shorter holiday season, winter storms that led to closings of over 200 stores companywide, and a cut in food stamp benefits that led to a decline even in its traditionally strong grocery business. Wal-Mart shares dropped almost 2 percent in early trading, biggest Dow decliner. The company said continued winter storms have led to a sales decline so far this month and that the global retail landscape remains challenging, hurt by low inflation, relatively high unemployment and “fragile” consumer confidence.

T = Technicals on the Stock Chart Are Mixed

Wal-Mart stock has been trending higher over the last couple of years. However, 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 below its rising key averages which signal neutral to bearish 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

16.70%

36%

33%

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

March Options

Steep

Average

April 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 minimal 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-18.56%

5.56%

5.93%

4.59%

Revenue Growth (Y-O-Y)

1.51%

1.66%

1.68%

1.04%

Earnings Reaction

-1.24%*

0.22%

-2.60%

-1.70%

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

* As of this writing

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

-6.02%

-10.80%

-3.42%

-8.69%

-6.23%

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. The company today reported fourth-quarter results that were disappointing. The stock has made some progress in recent quarters, but is currently pulling back. Over the last four quarters, earnings and revenues have been increasing. However, investors have had conflicting feelings about Wal-Mart’s recent earnings announcements. 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.

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