Will Wal-Mart See Rising Prices?

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 operates 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 very affordable prices to consumers and companies worldwide.

Wal-Mart has stopped expansion in India while the company is under two different investigations there and the government has tightened regulations on foreign-owned retail businesses. The Indian government is investigating Wal-Mart for a loan the company took out that would become equity once the government changed regulations to allow foreign ownership of front-end grocery stores. Wal-Mart is also investigating whether some of its employees in the country broke the U.S. Foreign Corrupt Practices Act by bribing officials to open stores.

T = Technicals on the Stock Chart are Mixed

Wal-Mart stock has been coasting higher as it broke-out early last year. The stock is now consolidating as it digests gains from a recent run. 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

15.60%

33%

30%

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

Put IV Skew

Call IV Skew

September Options

Steep

Average

October 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 small 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 rising earnings and revenue figures over the last four quarters. From these numbers, the markets have not been pleased 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

7.59%

8.97%

14.01%

18.33%

12.49%

Wal-Mart has been a poor 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. The company is reportedly stopping expansion in India as it is being investigated by authorities. The stock has been consolidating as it digests gains from a recent run. Over the last four quarters, earnings and revenues have been rising, however, investors in the company have not been pleased. 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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