$WMT – Earnings Preview / Update

by Dan February 17, 2016 2:33 pm • Commentary• Trade Ideas

Event: Walmart (WMT) reports their Q4 results tomorrow before the open. The options market is implying about a 3.25% one day move, which is just shy of the average one day move following the last four reports, but rich to the 10 year average of about 2.5%.  The implied move looks fair.

Price Action / Technicals:  After a disastrous 2015, closing down 29%, WMT is showing impressive relative strength, up 8% on the year, up 18% from its 52 week lows made in mid November.

The two year chart below shows the sharp downtrend from its early 2015 highs above $90, to its November lows near $56.  Since Nov the stock has made a series of higher lows and higher highs, but over the last few weeks has consolidated in and around its 200 day moving average:

WMT 2 year chart from Bloomberg
WMT 2 year chart from Bloomberg

My View:  Despite the stock’s strong start to the year Wall Street analyst sentiment continues to be nasty, with only 5 Buy Ratings, 24 Holds and 2 Sells, with an average 12 month price target below where the stock is trading at $64.  This is not a good thing for those, like myself who spy lower lows in the stock in 2016.

Fundamentally, I suspect despite the closing of dozens of poor performing stores, the company will feel the continued sting of AMZN’s online competition, namely margin and eps pressure from their tech build to better compete with AMZN, combined with weak sales overseas, weaker margins in food sales here in the U.S. and the potential for a meaningful guide down for fiscal 2017

The stock trades at about 16x expected fiscal 2017 earnings. I see no reason why a stock like WMT with low single digit sales growth at best, who has massaged earnings with massive buybacks should trade at a market multiple.

 

We have expressed a bearish view on a couple of occasions back in January, rolling down this view after initial success (here and here), but at this point we will wait until after the results and see how the stock reacts. If there is a fiscal 2017 guide down, a move back to the downtrend from the Jan 2015 highs in the low $60s could be in the cards. We may step back in depending on the reaction in the stock by either fading a move higher or pressing weakness, but we don’t want to get further involved before the event itself and risk the profits from the first trade.

Estimates and Forecasts From Bloomberg

-4Q adj. EPS est. $1.46 (range $1.41-$1.51); co. reiterated forecast $1.40-$1.55 on Jan. 15
-4Q rev. est. $130.6b (range $127.05b-$132.82b)
-4Q total comp. sales ex. gas, FX impact est. +0.9% (Consensus Metrix, avg of 21)
-Walmart U.S. comps. ex gas, FX +1.0%, co. forecast around” +1% in Nov.
-Sam’s Club comps. ex gas, FX +0.5%, co. forecast unchanged to +1%
-1Q adj. EPS est. 91c (range 85c-$1.00)
-FY17 adj. EPS est. $4.13 (range $3.96-$4.32)
-FY17 rev. est. $491.02b (range $479.33b-$511.59b)