$WMT Q3 Earnings Cheat Sheet

by Enis November 12, 2014 10:18 am • Commentary

Event:  WMT reports earnings tomorrow, Nov. 13th, before the open.  The options market is implying a 2% move, which is above the 4 quarter average of 1.25%, but in line with the 8 quarter average of 2%.

Sentiment:  Wall Street analysts are not positive on WMT, with 15 buys, 18 holds, and 4 sells, and an average 12 month price target of $78.  WMT is flat in 2014.  Short interest is around 2.25%, which is low on an absolute basis, but near a 3 year high on a relative basis.

Options Open Interest:  Options open interest is skewed towards calls by a ratio of 1.6 to 1, a skew that has built up over the past month through heavy call buying.  The volume over the last month has favored calls over puts by a ratio of 2 to 1.

The Nov22nd 77.50 call line has nearly 25k of open interest, and the Nov22nd 80 call line has over 35k of open interest.  The Jan15 82.5 calls were also active in the past week, and that line now has over 35k of open interest.  

Price Action/Technicals:  WMT’s all-time high of $70 from December 1999 held for over a decade, before the stock finally broke out above that prior high in 2012.  WMT has essentially been rangebound ever since:

[caption id="attachment_47975" align="alignnone" width="600"]WMT monthly chart, courtesy of Bloomberg WMT monthly chart, courtesy of Bloomberg[/caption]

Zooming into a daily view, we can se that the 2014 range has been even tighter, with the stock now testing the upper end of that range:

[caption id="attachment_47981" align="alignnone" width="600"]WMT daily chart, courtesy of Bloomberg WMT daily chart, courtesy of Bloomberg[/caption]

The stock has moved quite quickly from the lower end of the range to the higher end of the range, though a move and hold above $80 after earnings would certainly be significant.

Volatility:  30 day implied volatility recently hit a 2 year high, though it has settled back into the mid-teens as the market has rallied:

[caption id="attachment_47982" align="alignnone" width="600"]30 day implied volatility in WMT, courtesy of Bloomberg 30 day implied volatility in WMT, courtesy of Bloomberg[/caption]


Call buying has picked up recently, so even if the stock does not move much on earnings, it’s unlikely that 30 day implied vol in WMT will move below 12 in the near term.

Our View:  WMT seems fairly valued at a P/E of about 16x with expected EPS growth of 5% on sales growth of 3-5%.  It is a less cyclical name compared to other retailers, which is why the low growth is tolerated in exchange for a steady dividend yield and less downside risk.

The fundamental situation is a stalemate in our opinion given the weak business trends but the fair valuation.  The technical situation remains rangebound, though the recent call buying is notable.  Dan laid out our thoughts on the stock in Tuesday’s MorningWord, with the following conclusion:

So for those looking to leverage existing longs in the event of a fervent activist, out of the money upside calls still seem like a pretty reasonable way to do so, understanding that this should represent the speculative portion of your WMT investment thesis because the vol is high.  For those that are happy with the new found enthusiasm but think the likelihood of an activist entering the picture is low, the recent pop in price and IV could present a good opportunity to add some yield to your holding by selling some slightly pumped up calls against your holding.

That remains our general view ahead of earnings tomorrow.