Should You Sell Before Wal-Mart's Earnings Report?

May.13.13 | About: Wal-Mart Stores, (WMT)

Wal-Mart (NYSE:WMT) is the largest global retailer and is announcing its Q1 results on May 15th. The stock has been following closely the Dow Jones this year and it has been consolidating near its all-time high ($79.5) during the last month. The question is whether its shareholders should keep or sell their shares before the earnings report.

Fundamentals

Wal-Mart is an exceptionally managed company that has grown its earnings for more than 11 consecutive years (I have studied only the data after 2000). Even more impressively, it was one of the very few companies that managed to increase their earnings per share by 12% during the great recession of 2009.

Wal-Mart currently trades at around $79, which corresponds to a reasonable trailing P/E ratio 15.7, just like its competitor Target (NYSE:TGT) and much lower than its competitor Costco (NASDAQ:COST), which has a P/E of 25. It should be noted that the overvaluation of Costco could be attributed to the higher expected growth rate of Costco compared to Wal-Mart (consensus of analysts is 15% vs. 6%, respectively).

Wal-Mart currently distributes annually 3% to its shareholders through dividends and another 3% through its share repurchases for an attractive total yield of 6%. Target distributes 6% too (2% dividends and 4% share buybacks) while Costco yields only 1% through its dividends, with negligible share buybacks.

Some investors focus on the great size of Wal-Mart (annual sales $469 B) and question the ability of the company to grow further. However, the company is widely expanding in emerging countries, such as Brazil and China. To be sure, its international sales (outside USA) rose from 24% of total sales in 2010 to 26% of total sales in 2011 and 28% in 2012. Therefore, the company proves that it can maintain its past growth rate by expanding in new markets.

Moreover, the company has managed to grow all these years without significantly raising its debt. Its net debt is somewhat less than 7 years' earnings and hence the company can keep expanding without significant financial restrictions.

Technical picture

Despite the great performance of the company, the stock disappointed its investors for a whole decade, till the autumn of 2011, as it was yielding a negative return. This divergence between the performance of the company and its stock was due to the pronounced overvaluation of the stock during 1999-2001. However, after the stock traded in a very confined range ($40-$60) for 13 (!) years (1999-2012), the stock broke above that range a year ago and is now near its all-time high ($79.5).

During the last month, the stock has been trading in a very narrow range near its record level. My experience has taught me that this behavior, i.e. consolidation around the historical record, means that the stock is just taking a breather and is about to record new all-time highs. If a stock is to retreat from record levels, it usually does not stay for a whole month around them. Nevertheless, even if the stock retreats from these levels, the decline will probably be temporary, as the stock price will soon rebound to reflect the ever-growing earnings of the company.

Therefore, both from a fundamental and a technical point of view, I recommend holding the stock of Wal-Mart; it is just a question of time to break above its recent consolidation range.

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.