Your Earnings Season Preview: Wal-Mart

Mar.25.13 | About: Wal-Mart Stores, (WMT)

Past Performance: In the past four years, Wal-Mart (NYSE:WMT) has only missed EPS expectations twice. Both of those EPS misses came in Q3 and Q4 of 2012. Wal-Mart's Q1 earnings were stagnant from 2011 to 2012, but grew in Wal-Mart's Q1 of 2013 by more than 10%. EPS expectations for this earnings season are just $1.15, just a 5% increase over last Q1. The modest expectations could provide an opportunity for Wal-Mart to blow away the street.

Wal-Mart suffered a pullback in mid February when reports surfaced of an internal email between top executives that sales had been horribly disappointing. The stock pulled back to just $68.76 before rebounding to current levels north of $74 per share. Wal-Mart's stock is trending towards overbought levels, but still has some room to enjoy some price appreciation before getting there. Wal-Mart has support at $72 per share and resistance at $77 per share. An earnings beat should help Wal-Mart challenge that resistance level.

Fundamentals: Wal-Mart trades with a current P/E of 14.80, a forward P/E of 12.65, a P/S of 0.52, and a PEG ratio of 1.54. Compare those metrics to both the consumer services sector and the S&P 500 average. The consumer services sector trades with a current P/E of 21.2 and a forward P/E of 24.9. The S&P 500 trades with a current P/E of 20.6 and a forward P/E of 17.3. Wal-Mart looks cheap in comparison to both the consumer services sector and S&P 500.

The PEG ratio shows Wal-Mart's need to grow earnings further, which should be helped by shrinking unemployment numbers and more disposable income for consumers. Cash and cash equivalents grew by roughly 8% during the third quarter last year, and inventory levels stayed in line with Q4 levels from 2011. Management has grown total assets on the balance sheet by an average of 7.5% of over the past three years on a YOY basis. With a P/S of 0.52, WMT's stock shows plenty of room for growth.

The Story: Wal-Mart will benefit from a strengthening US economy. Lower unemployment numbers will allow consumers to buy more than just the basic essentials. Higher end items with larger profit margins will return to customers' shopping carts, which will give Wal-Mart more top and bottom line growth. China's sluggish economy could present challenges to more rapid growth as far as store openings are concerned. However, same store sales for Wal-Mart have still shown healthy growth for the company on a YOY basis. The sluggish turnaround in the world economy, with a reviving US economy, actually presents a perfect situation for Wal-Mart. Wal-Mart can capitalize off of the "penny pinchers" who are still recovering from nearly a decade of hard times.

The current economic times allow Wal-Mart an advantage over competitors such as Costco (NASDAQ:COST), which consumers have to pay fees to just to enter the facility, and Whole Foods (NASDAQ:WFM), which doesn't offer the same variety. WMT may not offer the bulk buying opportunity of Costco or the more unique products that Whole Foods does, but Wal-Mart's "one stop shopping" opportunity gives consumers the reduced prices and convenience consumers crave. With the new Wal-Mart credit card being pushed harder at registers, it could provide Wal-Mart a customer loyalty that the store's lack of costumer service can't provide. The Wal-Mart credit card can provide WMT customers the incentive to provide the company with brand loyalty, and increased long term sales.

How to Play It: With a recovering US consumer and a sluggish world wide economy, Wal-Mart has plenty of room to grow. Management has shown time and time again that they know how to side-step macroeconomic pitfalls and return value to shareholders. Look for Wal-Mart to challenge ten year highs over the next year. My personal 52-week price target: $81.00.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

Additional disclosure: Always consult with your registered financial professional before adding a new position to your portfolio. Investing involves a significant risk of loss, as such never invest more than you can afford to lose.