Wal-Mart Earnings Preview: At 8X Cash-Flow, Don't Sweat The Tax Refund Weakness

Feb.17.13 | About: Wal-Mart Stores, (WMT)

Wal-Mart (NYSE:WMT) the retail juggernaut that manages to generate consistent earnings growth in almost all economic environments, is scheduled to report its fiscal Q4 '13 financial results before the market opens on February 21st, 2013.

Analyst consensus is expecting $1.57 in earnings per share (EPS) on $128.8 billion in revenue for expected year-over-year growth of 9% and 4% respectively.

It looks like analyst consensus is expecting +1.5% - +2.5% for the Wal-Mart US comp for fiscal Q4 '13. (Interesting that most of the "comp" is being driven by price, as WMT has not had a strong traffic quarter in a while.)

Given the traffic and the sheer volume of merchandise a $470 billion a year retailer does in terms of revenues, the 4th quarter is usually the best quarter of the four in terms of margins: expect a gross margin near 25% and operating margin between 6% - 6.5%.

If consensus estimates are met, for all of full year fiscal 2013, WMT will have grown earnings per share and revenues, 10% and 5% respectively.

Both the EPS and revenue estimate have been revised lower since the last earnings report in November '12, with the last quarter including Superstorm Sandy.

The stock's total return was about 14% in 2012, excluding the dividend.

In its fiscal 3rd quarter, WMT missed on revenues, all thanks to foreign exchange fluctuations, as sales grew 3%, and EPS rose 11%. Total comp's rose just 1.6% (ex gasoline). The Wal-Mart comp came in lighter than expected at 1.5% and the Foreign Corrupt Practices Act reared its ugly head over WMT's dealings in Mexico.

On Friday, news broke of an internal memo between Wal-Mart managers that talked of a disastrous start to February sales for the huge retailer. The stock was weak on Friday, and we nibbled on a few shares in the $68 price area.

Analysts had discounted the payroll tax in their 2013 numbers but as Dan Binder of Jefferies pointed out late Friday, he thought some of the weakness could be due to later-than-usual tax refunds coming from the IRS thanks to the delayed start of tax return filing for 2012 returns. Dan noted that - thanks to the delayed filing date - there was $22 billion less in circulation for the first week of February 2013 than the first week of Feb. 2012. This could be an issue for a lot of retailers and a chance to buy the sector at reasonable prices.

Last summer, 2012, WMT broke above its late 1999-early 2000 all-time high of $70.25 as US comparables started to improve. When WMT has problems with its US comp's, the stock tends to flag. As US comp's improved in early and mid 2012, the stock broke out, but has since consolidated on weaker US comp's the last quarter.

I do think the US or Wal-Mart comp is the key to the stock over the next year, particularly in the face of rising gasoline prices, the ending of the payroll tax benefit, and higher taxes and healthcare costs being borne by the middle-class.

While the Presidential debates were all about the middle class and preserving middle class tax cuts, the fact is the typical Wal-Mart customer is feeling the majority of the brunt on reinstatement of the payroll tax allowance, and higher healthcare costs.

The unfortunate aspect is that reinstating the payroll tax and the higher healthcare costs hits WMT at both ends: both as the US's single largest employer, which means withholding taxes are higher for employees, as are healthcare costs, but WMT's typical demographic has lower discretionary income and thus less to spend.

The typical Wal-Mart customer has been squeezed for a while, so the tax hikes won't help, and the recent rise in gas prices won't help discretionary income.

That being said, there are two positive developments occurring that will help the Wal-Mart demographic: jobless claims are falling and the labor market is steadily improving, and home prices are once again on the rise, which will definitely help the mid-to-lower end of the housing market.

To be upfront, I have long been a huge fan of what I consider to be the best run business in America, i.e. Wal-Mart. Closing in on $500 billion in annual revenues, which represent about 10% of US retail sales, this merchandising and retailing juggernaut has an earnings consistency that is just frightening: even during the 2008 Great Recession, WMT didn't have negative quarter of earnings or revenue growth, despite its size. (Jan '09 y/y EPS growth was a negative 1/2 of 1%, which I found amazing given WMT's size, and I'll give them the benefit of the doubt on the 1%.)

Trading at 8(x) cash-flow, WMT has reduced its capex slightly for 2013, which means the company will have more cash for share repurchases. Hopefully the capex reduction isn't a tell for its longer-term growth prospects, and possibly a response to higher taxes and potential sequestration, but the extra cash will likely be returned to the shareholder.

Current fiscal 2014 (ends Jan '14) estimates of $5.38 in EPS and $496 billion in revenues assumes 9% and 5% growth respectively, about normal for what WMT can do in any year. The retailer has a lot of levers it can pull from inventory to margins, to suppliers, etc.

We expect the company to guide for calendar '13 conservatively.

We would buy a drop to $65 - $67.50 in the stock, and our internal valuation model puts a fair value on WMT of $76 - $80. Morningstar has a fair value on WMT of $72.

In our opinion, WMT is the best real-time, coincident economic indicator in the market today. As America's single largest employer and with $500 billion in annual sales, WMT covers the scope and breadth of the US economy.

A better labor market, and home prices are two good signs. Falling gas prices would be a big plus. This company will continue to allocate capital back to the shareholder in the form of dividends and share repurchases too. Cash-flow generation is prodigious.

This week could be tough for the stock as the memo gets obsessed about in the financial media, but do not be surprised if it is entirely discounted in the stock price by Thursday morning.

Disclosure: I am long WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.