Earnings: Will Tax Time, Gas Savings Paint Brighter Outlook For Wal-Mart?

| About: Wal-Mart Stores, (WMT)

Summary

Wal-Mart is expected to report declining revenue for the first time in at least the last 25 years, according to Wall Street analysts.

Trading has been fairly active in WMT's shares leading up to the earnings release while implied volatility on the stock is relatively high at the 89th percentile.

MGM's shares are riding a momentum train of late, due in part to comments from Steve Wynn last week.

When Wal-Mart Stores (NYSE:WMT) reports earnings before the market opens Thursday, the results could be history making - not necessarily good news for the world's largest retailer. Due largely to tough competition from its e-commerce rival Amazon (NASDAQ:AMZN), WMT is expected to report declining revenue for the first time in at least the last 25 years, according to Wall Street analysts.

Analysts reporting to Thomson Reuters believe the blue chip's revenue probably fell to $130.76 billion in Q4, down just 1% from the comparable year-ago period. WMT's earnings are projected to fall to $1.43 a share, 11% lower than a year earlier. The company itself has guided for EPS in a range of $1.40 to $1.55.

Some of the company's challenges are seen up and down the retail sector. And in fact, WMT's shares have performed well relative to some peers and the broader stock market so far in 2016 (figure 1).

According to traditional retailers who've reported or warned for upcoming results, their Q4 was a tough one because of strong e-commerce sales at sites including Amazon and a couple of epic winter storms. Industry analysts are also trying to figure out a consumer who generally wasn't willing to spend gas-pump savings on clothing and other items that usually go under the Christmas tree. Some analysts say that WMT's customer is typically more sensitive to budget-changers including gas prices, and so the cheaper gas factor could continue to play out for this stock.

WMT is again upping its hourly wage this month as part of its multi-year effort to increase wages. While that's good news for employees, it typically puts a dent in profits. Investors could also be tuning in for updates on several initiatives taken by the company in the last few months: closure of Walmart Express stores, plans to operate its own gas stations, and a new mobile payment app called Walmart Pay.

But there are global issues at work, too. WMT has been slammed by foreign-currency headwinds, which Yahoo Finance estimates slashed $12.3 billion from the top line in the last three quarters.

Welcoming Tax Time?

What may matter now is how the company sees the coming quarters, particularly Q1 when many tax-refund checks are cashed - and potentially spent in WMT stores. Could Q1 and Q2 deliver the earnings results that some investors are starting to price into shares?

Trading has been fairly active in WMT's shares leading up to the earnings release. Implied volatility on the stock is relatively high at the 89th percentile. Short-term option traders have priced in a potential 3.5% share price change in either direction around the earnings release, according to the TD Ameritrade thinkorswim® platform's Market Maker Move indicator.

As for options action, there's been aggressive buying of the Feb. 65 put options this week, but limited activity on the call option side. A few weeks ago, an increase in call buyers interested in the 67.50 strike emerged.

Note: Call options represent the right, but not the obligation, to buy the underlying security at a predetermined price and over a set period of time. Put options represent the right, but not the obligation, to sell the underlying security at a predetermined price over a set period of time.

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Figure 1: Turnaround Time?

Wal-Mart's shares are off 23% over the last year, but after bottoming in November, they've advanced 17% and are up around 7% since the start of the year, bucking the downward trend among broader equities.

Chart source: TD Ameritrade's thinkorswim® platform.

Data source: Dow Jones Indices.

Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

MGM: Macau's Future

Casino-operator MGM Resorts (NYSE:MGM) is also due to deliver its Q4 results ahead of the opening bell Thursday. Few Street analysts are overly bullish on expected results, but estimates do suggest improvement from the year-ago comparable.

At Thomson Reuters, the average earnings estimate sits at $0.08 a share compared with a surprise loss of $0.70 a share a year ago. Revenue is projected to decline to $2.3 billion from $2.4 billion in the year-ago period. In fact, top-line sales hovered near that mark each quarter last year.

Industry analysts are pinning the tough performance on the challenges that MGM and other gaming companies faced in Macau, China's gambling harbor. Besides the economic slowdown in China, Beijing cracked down on reports of corruption and the number of gambling tables allowed in Macau, impacting casino tallies. Strong-dollar issues also touch U.S.-listed MGM.

But MGM's shares are riding a momentum train of late, due in part to comments from Steve Wynn last week. The head of rival Wynn Resorts (NASDAQ:WYNN) reported depressed Q4 earnings and revenue, but noted on a conference call that January sales in Macau were "the best month in a long time," industry analysts reported. That has some on Wall Street believing that things are stabilizing in Macau, potentially a boon for MGM, too.

This speculation helped boost the company's shares, which tend to trade in a volatile manner (figure 2). Implied volatility on the stock is at the 90th percentile as the earnings release nears.

Short-term option traders have priced in a potential 7% share price change in either direction around the earnings release, according to the TD Ameritrade thinkorswim® platform's Market Maker Move indicator. As for options, buyers jumped in for the Feb. 18.50 put options, mostly this week. Buyers are also lining up for the Feb. 19 call options.

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Figure 2: News-Driven Bounce.

Since hitting a 52-week gutter last week, MGM Resorts' shares are up nearly 16%, driven in part by upbeat comments on Macau from a rival casino operator.

Chart source: TD Ameritrade's thinkorswim® platform.

Data source: Standard & Poor's.

Not a recommendation. For illustrative purposes only. Past performance does not guarantee future results.

TD Ameritrade® commentary for educational purposes only. Member SIPC. Past performance no guarantee of future results. Options involve risks and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options.

Disclosure: I/we 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. I have no business relationship with any company whose stock is mentioned in this article.