New Trade WMT: Crude Gonna Crimp

by Dan March 16, 2012 3:15 pm • Commentary

Here is a quick preview of what I will be discussing tonight on Options Action on CNBC at 5pm eastern:

WMT reported a disappointing Q4 back on Feb 24th and the stock was down nearly 4% the day of earnings and another few % in the following days.  In their all important Q4, sales growth slowed sequentially while margins were razor thin on increased costs and heavy discounting.  With crude oil holding firm above $105 and looking poised to make new 52 week highs on any flare up in tensions in the Middle East, WMT may re-trace the move back towards the post earnings lows last month.  The stock has rallied back about 5% on relatively low volume to fill in most of the earnings gap.

1 YR WMT Chart From Bloomberg LP


IN  a note to clients on Feb 22nd following WMT’s earnings miss, Goldman Sachs, who rates the shares Neutral with a $58 12 month target had the following to say about the price weakness:

Multiple re-rating likely to persist

The combination of a modest comp acceleration, margin contraction, and continued investments in expanding stores led WMT’s ROI to deteriorate to 18.6% from 19.2%. As a result, the shares sold off 3.9% (vs. +0.1% S&P 500) as the market has continued to re-rate the shares to be more in line with other mature retailers.  For instance Mature Dept Store KSS trades at 11.1x expected 2012 earnings, mature grocer KR trades at 11.4x 2012 expected earnings, while WMT at about $61 trades at 12.5x this yrs expected earnings.

WMT’s growth engines still a work in progress

While WMT International exceeded our top-line expectations, the performance varied by region. More developed markets such as Mexico, Canada, Japan and the UK saw sequential improvements in both sales and operating income. In contrast, WMT’s largest growth markets, Brazil and China, saw deteriorating traffic and profit trends.


MY VIEW: while the stock isn’t exactly expensive at about 12.5x this year’s expected earnings, and buoyed by its 2.6% dividend yield, the stock could face near term headwinds from oil continuing to rally and more evidence of growth slowing in China and emerging markets. Oh, and come on, AAPL has to be sucking $ out of the entire consumer discretionary space.

I want to make a near term, low premium bet that WMT retraces the recent move.

TRADE: WMT $61.00 Bought the Apr 60 / 57.50 Put Spread for .35

-Bought 1 Apr 60 Put for .48

-Sold 1 Apr 57.50 Put at .13

Break-Evens on Apr Expiration:

Profits btwn 59.65 and 57.50 make up to 2.15, max gain of 2.15 at 57.50 or below.

Losses of up to .35 btwn 59.65 and 60 and max loss of .35 above 60.00


Also company hosting a meeting for the investment community on April 12th to speak about their international business, this could serve as a negative catalyst given their recent results in Brazil and China: