Event: WMT will report their Q3 earnings on Thursday before the open. The options market is implying about a 2.75% move vs the 4 qtr avg move of about 2.35%.
Sentiment: Wall Street analysts are relatively neutral on WMT, with 15 buy, 16 hold, and 2 sell ratings on the stock. The average 12 month price target is ~$81.5, and short interest sits at just 1.6% of the float.
Options Open Interest: Total open interest is skewed towards puts by a ratio of 1.15 to 1. The 1 month average volume has also been skewed to puts, by a ratio of 1.2 to 1. The Nov 77.5 puts and calls both have the most open interest among near-term strikes (16k and 12k respectively), while the Jan14 80 calls have over 20k of open interest.
Technicals: WMT stock got off to a very strong start in 2013, but it has been dead money for 6 months now:
The stock has been trading in the 72-80 range ever since its break of $72 in early March. On a longer-term chart, we can see the importance of the $69-71 area, which was the all-time high in WMT from 1999, until last year:
WMT has essentially been consolidating ever since that breakout in mid-2012. A convincing break of $80 would be the end of that consolidation, while a move lower from here would have us anticipating continued range trading going forward.
Fundamentals: WMT has been flat for the past year, with earnings and sales growing only marginally (1-3%) in that period. Wal-Mart blamed the payroll tax hike of 2% as an impediment to sales growth in the U.S. (around 72% of sales). In addition, the economic environment overall has been more challenging for the low-end consumer than for the high-end, which has benefitted from higher asset prices.
WMT alluded to macro concerns in its October analyst day, so expectations are not too high for tomorrow’s earnings report. The one positive for WMT is on the valuation front – at around 15x, the P/E multiple is reasonable for a company expected to grow earnings 3-10% over the next 3 years. The real concern is whether a company as large as WMT (almost $500 billion in sales already) can meet those growth projections.
Vol SnapShot: Implied volatility (red line) has been between 12 and 20 the entire year. Realized volatility (blue) in 2013 has not been above 15:[caption id="attachment_32531" align="alignnone" width="600"] 30 day implied volatility (red) vs. 30 day realized volatility (blue) in WMT, Courtesy of LiveVolPro[/caption]
With implied volatility down at 15 ahead of the earnings report, even if options are likely a sale based on the low level of realized volatility this year, the risk/reward is not favorable with premium priced cheaply.
My View: WMT’s report is unlikely to generate a big move, but we’re more curious about whether a new breakout above $80 is imminent.
We put on a bullish WMT trade earlier this year with cheap valuation in mind, but WMT has been dead money for 6 months, and our trade was a loser. On a relative basis, the stock still looks somewhat cheap, but the company’s inability to deal with continuing macro concerns is a problem for the long-term gradual growth story.
With that in mind, we think more of the same is the recipe for this stock. Range bound price action between $72 and $80 is our expectation, though low implied volatility likely keeps us away from a range trade bet on earnings.