Wal-Mart: Store of Value in a Shaky Economy

Wal-Mart (NYSE:WMT) July 2, 2009 $47.79

52-week range: $46.25 (Feb. 2, 2009) - $63.85 (Sep. 19, 2008)
Dividend = $0.2725 quarterly = 2.28% current yield

While business is not exactly booming right now, Wal-Mart still is expected to post another all-time record fiscal year when things wrap up next January 31st. Zacks looks for EPS of $3.56 and $3.89 for FY 2009 and 2010 respectively, up from FY 2008’s $3.42.

The dividend was raised 15% in the June quarter to an annual rate of $1.09 giving WMT shareholders a decent and well covered 2.28% current yield. This is the highest yield in WMT’s history. Revenues of over $401 billion in FY 2008 made Wal-Mart the world’s largest retail operation.

Despite all the good news, Wal-Mart shares trade very close to their 52-week nadir and only 15% off their 9-year absolute low price set just after the 9/11 shock of 2001. The current multiple of about 13.4x this year’s and 12.4x FY 2010’s estimate is the lowest ever.

Here are the per share numbers from continuing operations as reported by Value Line:

Value Line rates WMT’s financial strength as ‘A++’ and notes they fall in the top 1% of their 1700 stock universe in both ‘stock price stability’ and ‘earnings predictability’. Morningstar assigns WMT four stars (out of 5) and figures ‘fair value’ at $60/share.

Unless you think the world is going down the drain it’s hard to see WMT as having much downside risk from today’s $47.79 quote. Even if you believe nothing big is on the near-term horizon here are two combination plays that make good sense…

If Wal-Mart shares move up by at least 4.7% to > $50 by Jan. 15, 2010:

• The $50 calls will be exercised.

• You will sell your shares for $50,000.

• The $50 puts will expire worthless.

• You will have collected $545 in dividends.

• You will have no further option obligations.

• You will hold no shares and $50,545 cash.

That would represent a best-case scenario, net profit on your original net cash outlay of $10,255 / $40,290 = 25.4% achieved in under 6.5 months on shares that only needed to rise by 4.7% .

What’s the risk?

If Wal-Mart shares finish < $50 on Jan. 15, 2010:

• The $50 calls will expire worthless.

• The $50 puts will be exercised.

• You will be forced to buy an additional 1000 shares.

• You will need to lay out another $50,000 cash.

• You will have received $545 in dividends.

• You will have no further option obligations.

• You will hold 2000 WMT shares and $545 cash.

What’s the break-even point on the whole trade?

On the first 1000 shares it’s the $47.79 purchase price less the $2.50 /share call premium = $45.29 /share.

On the ‘put’ shares it’s the $50 strike price less the $5.00 /share put premium = $45.00 /share.

Your break-even would be $45.15 /share (ignoring dividends) and $44.88 /share (including dividends).

Wal-Mart shares could drop by as much as 6% without causing a loss on this trade.

Here’s the same trade but using an expiration date out to January 2011:

If Wal-Mart shares move up by at least 4.7% to > $50 by Jan. 21, 2011:

• The $50 calls will be exercised.

• You will sell your shares for $50,000 cash.

• The $50 puts will expire worthless.

• You will have collected at least $1,635 in dividends.

• You will have no further option obligations.

• You will hold no shares and $51,635 in cash.

That would represent a best-case scenario, net profit on your original net cash outlay of $16,645 / $34,990 = 47.5% achieved in under 18.5 months on shares that only needed to rise by 4.7% .

What’s the risk?

If Wal-Mart shares finish < $50 on Jan. 21, 2011:

• The $50 calls will expire worthless.

• The $50 puts will be exercised.

• You will be forced to buy another 1000 WMT shares.

• You will need to lay out an additional $50,000 cash.

• You will have received at least $1,635 in dividends.

• You will end up with 2000 WMT shares and $1,635 cash.

What’s the break-even point on the whole trade?

On the first 1000 shares it’s the $47.79 purchase price less the $5.00 /share call premium = $42.79 /share.

On the ‘put’ shares it’s the $50 strike price less the $7.80 /share put premium = $42.20 /share.

Your break-even would be $42.50 /share (ignoring dividends) and $41.69 /share (including dividends).

Wal-Mart shares could drop by as much as 12.7% without causing a loss on this trade.

NOTE: Buying shares and selling puts now, while waiting to sell covered calls later, could add greatly to the potential profits on these trades. It would increase the risks, however, by making the cash outlays and the break-even points higher unitl you actually sold the calls at [hopefully] higher prices than are available today.

Disclosure: Author is long WMT shares and short WMT options.

Comments

[Ted Hurlbut:]

Better to see Walmart as the counter-cyclical play that it is. Track the daily moves vs. RLX over the last six months and you'll see they move counter to each other on most days.

Jul 06 09:42 AM

[madmilker:]

People in America need to realize jus what got America in this shape…”cheap” yes so-call cheap items from a foreign land.

quote*Wal-Mart firmly believes in local procurement. We recognize that by purchasing quality products, we can generate more job opportunities, support local manufacturing and boost economic development. Over 95% of the merchandise in our stores in China is sourced locally. We have established partnerships with nearly 20,000 suppliers in China. *end quote!

Now! if there be 182 country’s making items for the world to buy and they have only 5% of the pie in China…duh! This company makes the nice people of China support their currency(yuan) by keeping it in their country working for the people there…. but with the “yuan” going up in value and the US dollar going down…all the foreign items that the American consumer buys thinking it is cheap has went up in price.

People…its all about the currency and to keep a currency strong you got to keep it floating around the country you live in so it can work for you. For the past 12 years all them US dollars are being shipped overseas to a foreign bank and with the American worker not making anything for the foreigner to buy the “we the people” have to turn to the “second” largest employer in America(Uncle Sam) to sell “we the people” debt in order to get all them dollars back!

50 years ago a foreigner would had given their left nut for a US dollar or a Hershey’s chocolate bar and today the same foreigner has got Uncle Sam and the American consumer by both all the while Hershey is moving the chocolate factory to Mexico. Wake up! America and think “MADE IN AMERICA.”

Aug 05 09:01 PM