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Wal-Mart Can Have A Good End To 2014

August 21, 2014 | About:
Faisal Humayun

Faisal Humayun

2 followers

Wal-Mart (WMT) has declined by 5.1% in year-to-date 2014 as the economic scenario remains uncertain. However, the last 4 months of 2014 can be good for Wal-Mart, and investors can consider this low beta stock at a time when markets also look overvalued. This article discusses the reasons to be positive on Wal-Mart for the remainder of 2014.

The first positive comes from the minutes of the policymakers released yesterday. There is a debate to increase interest rates sooner on a strong job market recovery. This is a positive sign as it indicates that the overall economy is improving. For Wal-Mart, this is a big positive as we move into the festive season in the last quarter of 2014 and the first quarter of 2015.

If the economy is indeed better than it was during the same time last year, Wal-Mart can expect a pick-up in sales in 3Q14 and 1Q15 and this will positively impact the stock.

For the fourth quarter of 2013, Wal-Mart stock had gained 6.93% and the stock had gained 13.7% for the full year. This is an indication that, if economic sentiments are positive, the stock tends to have a good fourth quarter. As the unemployment report gives a positive picture, it is likely that Wal-Mart will do well.

Another factor that supports the Fed’s statement and my view that Wal-Mart is likely to do well in the festive season is the consumer confidence index. Currently, the consumer confidence index is at its highest level since 2008. As consumers feel more optimistic on the economic recovery, the consumption should get a boost and this will be positive for Wal-Mart.

As I mentioned earlier, another factor for considering Wal-Mart is that the company has a low beta of 0.37. The market is currently trading at a Shiller PE of 26.3, and this is higher than the mean Shiller PE of 16.55. It would not be surprising if the markets correct, and it is also better to be invested in a low beta stock than a high beta stock in times of market correction. Wal-Mart also offers a healthy dividend yield of 2.5% along with a low beta factor.

Another factor that makes me bullish on Wal-Mart for the near term and for the long term is the company’s focus on e-commerce. Recently, Wal-Mart lowered its 2014 earnings forecast to earnings per share between $4.90 and $5.15, from the prior estimate of $5.10-5.45.

The lowering of the forecast has been due to higher investments in e-commerce and I believe that this will bring in long-term positives for the company. Investors should therefore ignore the near-term cut in EPS because of the e-commerce investment.

I am also encouraged by the e-commerce sales growth as Wal-Mart reported an online sales increase of 27% in the first quarter of 2014 and a sales increase of 24% in the second quarter of 2014. Considering this strong growth, the company’s investment in e-commerce is already producing positive results. As e-commerce gets bigger for Wal-Mart, the company’s margins are likely to improve.

In conclusion, Wal-Mart is an attractive buy for the near-term and is also good for the long-term. Shareholder value creation is likely to come through dividends, share buyback and capital appreciation as economic recovery is more sustained in the United States. In addition, Wal-Mart can spring surprises related to its e-commerce business. The company’s e-commerce business is still very small, but has the potential to grow exponentially. Certainly, there are exciting times ahead for Wal-Mart.

About the author:

Faisal Humayun
Senior Research Analyst with experience in the field of equity research, credit research, financial modelling and economic research

Rating: 4.0/5 (1 vote)

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