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Is Wal-Mart a Good Buy at These Levels?
Posted by: Faisal Humayun (IP Logged)
Date: June 10, 2014 02:31PM

In 2014, the S&P 500 Index has surged by 5.6%. During the same period, Wal-Mart (WMT) declined by 2.5%. This article discusses the reasons for the poor stock performance and analyzes if the company is a good buy at current levels.

Weak Results and Guidance...

For the first quarter of 2014, Wal-Mart reported diluted EPS of $1.10, a decrease of 3.5% as compared to the first quarter 2013 EPS of $1.14. Muted EPS for the first quarter of 2014 is the first reason for the relatively depressed stock price action for Wal-Mart.

In terms of guidance, Wal-Mart expects second quarter fiscal year 2015 diluted earnings per share from continuing operations to be between $1.15 and $1.25. In other words, the earnings for the second quarter of 2014 will be from flat to negative considering the fact that the EPS for the second quarter of 2013 was $1.24. Weak earnings guidance is the second reason for the current depression in the stock price.

I must mention here that one of the key factors that negatively impacted first quarter sales in the U.S. was the weather. Unseasonably cold and disruptive weather negatively impacted U.S. sales and drove operating expenses higher. However, the muted expectation in the second quarter is largely reflective of depressed consumer sentiment in the U.S.

...With A Silver Lining

With muted growth numbers all around for Wal-Mart, one figure that stood out was the e-commerce global sales, which increased by 27% for the first quarter of 2014. Wal-Mart has identified e-commerce sales as one of the growth drivers and is investing significantly in the area.

Currently, Wal-Mart has e-commerce presence in 10 countries. I believe that strong e-commerce sales can help Wal-Mart gradually increase its key margins over the next few years. However, this will still take time and on the flipside, the competition in the e-commerce segment is immense.

Peer Comparison

In terms of stock movement, Target (TGT) has witnessed a decline of 9.2% in 2014 as compared to 2.5% downside for Wal-Mart. Even after the sharp decline, Target currently trades at a trailing 12-month PE of 19.4 as compared to a trailing 12-month PE of 15.9 for Wal-Mart. On this front, Wal-Mart looks relatively attractive.

However, the five-year expected PEG ratio looks relatively attractive for Target as compared to Wal-Mart. While Target’s PEG currently stands at 1.3, Wal-Mart’s PEG is much higher at 1.9. This implies that Target is attractive when considering the future earnings growth potential.

In my view, the point, which works against Target, is its presence in just the U.S and Canada. Wal-Mart is more diversified and has presence in relatively high growth markets.

Conclusion

Wal-Mart is going through a relatively rough patch with muted earnings. The U.S. economic environment also remains uncertain, and it is unlikely that consumer sentiment will pick up relatively soon. The positive factors for Wal-Mart are its presence in some emerging g markets and its investment in e-commerce.

As compared to Target, Wal-Mart looks expensive in terms of future earnings potential. However, Target is much more local and sustained economic gloom can negatively impact the stock. Therefore, on a relatively basis, I would chose Wal-Mart over Target.

While I am positive on Wal-Mart on a relative basis, I am also of the opinion that investors need to stay in the sidelines before considering exposure to Wal-Mart. The relatively depressed sentiment in the stock is likely to sustain in the next quarter.

I believe that the end of the third quarter might be a good time to consider exposure to the stock. If the market corrects by 10% to 15% by that time, the stock will be even more attractive just before the festive season. For now, the best idea would be to remain on the sidelines.



Stocks Discussed: WMT, TGT,
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