$400+ billion sales Wal-Mart needs no introduction. Value Line awards them an A++ financial strength, their highest safety rating and gives them 100th percentile rankings [with 100th being best] in both ‘stock price stability’ and ‘earnings predictability’. Morningstar rates them 4-stars (out of 5) and sees ‘Fair Value’ as $60 /share. Standard and Poors gives them a ‘strong buy’ (5-star) rating and carries a 12-month target price of $62 /share. They agree with VL on the A+ financial strength (S&P’s highest score).
Why, then, are WMT shares near their 52-week lows? When the market tanked about one year ago investors flocked to Wal-Mart as a safe haven that figured to benefit from the ‘trade down’ in retail due to the punk economy. WMT hit $60.22 last October 6th on its way to posting FY 2008 earnings of $3.42 /share.
Now with EPS for FY 2009 (ends January 31, 2010) expected at $3.58 the shares are offered at $49.06 – just 6.1% above their 52-week low of $46.25. The huge run up in stocks since last March has bypassed Wal-Mart. Investors in safe, boring WMT have seen losses of 12.4% since the end of 2008. That makes money managers loathe to show its shares in their portfolios as they’d be sure to attract criticism.
Here are Wal-Mart’s per share numbers from (cont. ops) as reported by Value Line:
FY ........... Sales ....... C/F ......... EPS ......... Div. .......... B/V ....... Avg. P/E
2002 ....... 55.64 ...... 2.61 ....... 1.81 ........ 0.30 ......... 8.95 ........ 30.3x
2003 ....... 59.46 ...... 2.95 ....... 2.03 ........ 0.35 ........ 10.12 ........ 26.9x
2004 ....... 67.36 ...... 3.47 ....... 2.41 ........ 0.48 ........ 11.67 ........ 22.8x
2005 ....... 75.01 ...... 3.78 ....... 2.63 ........ 0.58 ........ 12.77 ........ 18.3x
2006 ....... 83.51 ...... 4.27 ....... 2.92 ........ 0.65 ........ 14.91 ........ 16.0x
2007 ....... 94.27 ...... 4.83 ....... 3.16 ........ 0.83 ........ 16.26 ........ 14.9x
2008 .......102.23 ..... 5.16 ....... 3.42 ........ 0.93 ........ 16.63 ........ 16.2x
Zacks sees FY 2009 and 2010 earnings of $3.58 and $3.89 making the multiples 13.7x and 12.6x respectively. That’s the lowest valuation ever for these high-quality shares and less than half the P/E level of 2002.
Wal-Mart raises the dividend each year. At today’s rate of $0.2725 quarterly, the current yield is 2.22%. That’s the highest payout ever for WMT and it compares quite favorably with rates on bank CDs, money markets and T-bills. It’s well covered at about 30% of this year’s earnings.
A return to even 15 times next year’s estimate would bring these shares back to $58.35, about 19% above today’s close. With the dividend added in you’d see approximately 22% total return by the end of 2010. (There will be 5 quarterly ex-dividend dates between now and then). Value Line sees a 3-5 year P/E of 16.5x while Morningstar assumes a long-term normalized P/E of 17x.
Risk? The absolute lows touched in calendar 2005-2006-2007-2008 and 2009 ranged from $42.10 to $46.30 - all when sales, cash flow, earnings and dividends were less than they are today.
If you’re not swinging for the fences WMT shares seem to provide a reasonable yield and a shot at sustainable double-digit capital gains.
Here’s a relatively low-risk way to make even better returns…
............................................................ Cash Outlay ........ Cash Inflow
Buy 1000 WMT @ $49.06 /share ............... $49,060
Sell 10 Jan. 2011 $50 Calls @ $4.60 /sh. ................................ $4,600
Sell 10 Jan. 2011 $50 Puts @ $6.20 /sh. ................................ $6,200
Net Cash Out-of-Pocket ........................... $38,260
If WMT shares creep up to at least $50 (+ 2%) by Jan. 21, 2011:
• The $50 calls will be exercised.
• You will sell your shares for $50,000.
• The $50 puts will expire worthless.
• You will likely have received at least $1,363 in dividends.
• You will have no further option obligations.
• You will end up with no shares and $51,363 in cash.
That’s a best-case scenario net profit of $13,103/$38,260 = 34.24%
achieved on shares that only needed to rise by 2% from trade inception over
the less than 15.5 months from start to expiration date. That’s better than 26% /year
on an annualized basis.
What’s the downside?
If WMT shares remain < $50 /share on January 21, 2011:
• The $50 calls will expire worthless.
• The $50 puts will be exercised.
• You will be forced to buy another 1000 WMT shares.
• You will need to lay out an additional $50,000 in cash.
• You will likely have received at least $1,363 in dividends.
• You will have no further option obligations.
• You will end up with 2000 WMT shares and $1,363 in cash.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $49.06 purchase price less
the $4.60 /share call premium = $44.46 /share.
On the ‘put’ shares it’s the $50 strike price less
the $6.20 put premium = $43.80 /share.
Your break-even would be the average of those two figures or $44.13 /share
(without dividends) or $43.45 /share (including the yield). Wal-Mart could fall by
up to (-11.4%) without causing a loss on this trade.
That $43.45 break-even price would be very close to the absolute low
prices since 1999 and at about 11.2x the projected EPS for the fiscal year
ending in January 2011.
Summary:
Wal-Mart is a low-risk, steady grower with a low valuation and a decent yield. A rebound to a still lower than normal P/E should bring these shares back to $58 or better over the next 12 – 18 months.
Selling both puts and calls at the $50 strike for January 2011creates a wide band of profitability that would allow for a 34% total return on any price increase of 2% or greater.
Even if I’m wrong you’d be protected against loss as long as WMT holds above $43.45 through expiration date in January 2011.
Disclosure: Author is long WMT shares and short WMT options.
Why, then, are WMT shares near their 52-week lows? When the market tanked about one year ago investors flocked to Wal-Mart as a safe haven that figured to benefit from the ‘trade down’ in retail due to the punk economy. WMT hit $60.22 last October 6th on its way to posting FY 2008 earnings of $3.42 /share.
Now with EPS for FY 2009 (ends January 31, 2010) expected at $3.58 the shares are offered at $49.06 – just 6.1% above their 52-week low of $46.25. The huge run up in stocks since last March has bypassed Wal-Mart. Investors in safe, boring WMT have seen losses of 12.4% since the end of 2008. That makes money managers loathe to show its shares in their portfolios as they’d be sure to attract criticism.
Here are Wal-Mart’s per share numbers from (cont. ops) as reported by Value Line:
FY ........... Sales ....... C/F ......... EPS ......... Div. .......... B/V ....... Avg. P/E
2002 ....... 55.64 ...... 2.61 ....... 1.81 ........ 0.30 ......... 8.95 ........ 30.3x
2003 ....... 59.46 ...... 2.95 ....... 2.03 ........ 0.35 ........ 10.12 ........ 26.9x
2004 ....... 67.36 ...... 3.47 ....... 2.41 ........ 0.48 ........ 11.67 ........ 22.8x
2005 ....... 75.01 ...... 3.78 ....... 2.63 ........ 0.58 ........ 12.77 ........ 18.3x
2006 ....... 83.51 ...... 4.27 ....... 2.92 ........ 0.65 ........ 14.91 ........ 16.0x
2007 ....... 94.27 ...... 4.83 ....... 3.16 ........ 0.83 ........ 16.26 ........ 14.9x
2008 .......102.23 ..... 5.16 ....... 3.42 ........ 0.93 ........ 16.63 ........ 16.2x
Zacks sees FY 2009 and 2010 earnings of $3.58 and $3.89 making the multiples 13.7x and 12.6x respectively. That’s the lowest valuation ever for these high-quality shares and less than half the P/E level of 2002.
Wal-Mart raises the dividend each year. At today’s rate of $0.2725 quarterly, the current yield is 2.22%. That’s the highest payout ever for WMT and it compares quite favorably with rates on bank CDs, money markets and T-bills. It’s well covered at about 30% of this year’s earnings.
A return to even 15 times next year’s estimate would bring these shares back to $58.35, about 19% above today’s close. With the dividend added in you’d see approximately 22% total return by the end of 2010. (There will be 5 quarterly ex-dividend dates between now and then). Value Line sees a 3-5 year P/E of 16.5x while Morningstar assumes a long-term normalized P/E of 17x.
Risk? The absolute lows touched in calendar 2005-2006-2007-2008 and 2009 ranged from $42.10 to $46.30 - all when sales, cash flow, earnings and dividends were less than they are today.
If you’re not swinging for the fences WMT shares seem to provide a reasonable yield and a shot at sustainable double-digit capital gains.
Here’s a relatively low-risk way to make even better returns…
............................................................ Cash Outlay ........ Cash Inflow
Buy 1000 WMT @ $49.06 /share ............... $49,060
Sell 10 Jan. 2011 $50 Calls @ $4.60 /sh. ................................ $4,600
Sell 10 Jan. 2011 $50 Puts @ $6.20 /sh. ................................ $6,200
Net Cash Out-of-Pocket ........................... $38,260
If WMT shares creep up to at least $50 (+ 2%) by Jan. 21, 2011:
• The $50 calls will be exercised.
• You will sell your shares for $50,000.
• The $50 puts will expire worthless.
• You will likely have received at least $1,363 in dividends.
• You will have no further option obligations.
• You will end up with no shares and $51,363 in cash.
That’s a best-case scenario net profit of $13,103/$38,260 = 34.24%
achieved on shares that only needed to rise by 2% from trade inception over
the less than 15.5 months from start to expiration date. That’s better than 26% /year
on an annualized basis.
What’s the downside?
If WMT shares remain < $50 /share on January 21, 2011:
• The $50 calls will expire worthless.
• The $50 puts will be exercised.
• You will be forced to buy another 1000 WMT shares.
• You will need to lay out an additional $50,000 in cash.
• You will likely have received at least $1,363 in dividends.
• You will have no further option obligations.
• You will end up with 2000 WMT shares and $1,363 in cash.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $49.06 purchase price less
the $4.60 /share call premium = $44.46 /share.
On the ‘put’ shares it’s the $50 strike price less
the $6.20 put premium = $43.80 /share.
Your break-even would be the average of those two figures or $44.13 /share
(without dividends) or $43.45 /share (including the yield). Wal-Mart could fall by
up to (-11.4%) without causing a loss on this trade.
That $43.45 break-even price would be very close to the absolute low
prices since 1999 and at about 11.2x the projected EPS for the fiscal year
ending in January 2011.
Summary:
Wal-Mart is a low-risk, steady grower with a low valuation and a decent yield. A rebound to a still lower than normal P/E should bring these shares back to $58 or better over the next 12 – 18 months.
Selling both puts and calls at the $50 strike for January 2011creates a wide band of profitability that would allow for a 34% total return on any price increase of 2% or greater.
Even if I’m wrong you’d be protected against loss as long as WMT holds above $43.45 through expiration date in January 2011.
Disclosure: Author is long WMT shares and short WMT options.
