Excerpts from Gilford Securities analyst Bernard Sosnick's recent note to clients on Wal-Mart (WMT):
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Investment Opinion: Wal-Mart’s February sales might provide the impetus for the stock to perform well relative to the S&P 500 and in actual terms. If economic and stock market conditions become favorable within the next 12-18 months, we believe WMT will move toward its all-time high of $70.
- Retailers reported weak sales for January, partially because recipients of Christmas gift cards did not spend them as quickly as in the past.
- US Wal-Mart’s same-store sales for January increased only 0.2%. This was better than what most retailers reported, partially because some shoppers used gift cards to purchase food. This revelation was scary, because it suggested that the discretionary spending power of some consumers had been squeezed dry.
- On February 19th, US Wal-Mart’s CEO made a surprisingly positive comment. He said, if Wal-Mart’s reporting period had been the same as that of other retailers, its January figure would have been 3% higher than was reported.
- This statement exposed Castro-Wright to embarrassment if Wal-Mart were to report weak sales for February. Since he made the comment when February was more than half over, we assume he was confident that February’s sales would be satisfactory.
- Guidance of $0.70-$0.74 vs. $0.68 for 1Q/08 issued seemed to support our belief that sales for February would not disappoint. (Our 1Q/08 EPS estimate is $0.72.)
- A same-store sales increase for February would provide evidence that US Wal-Mart is reenergized, in our opinion, and would likely draw investors to WMT as a safe haven during tough economic times.
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... Conclusion
- Although Wal-Mart is a huge and complex company, we believe its investment dynamic will be determined by whether or not US Wal-Mart, which accounts for about 60% of corporate revenues, improves or not.
- US Wal-Mart’s profits improved in 3Q/07 and 4Q/07, which were difficult periods for most retailers. (Adjusted 4Q/07 EPS was $1.04 vs. $0.93.) Guidance for 1Q/08 implies a favorable comparison for the US during a distressful period for many retailers.
- Despite the risks to sales and earnings posed by macro issues, first-quarter guidance and Castro-Wright’s comments about sales in January suggest that Wal-Mart is getting through a squall satisfactorily.
- February sales will be reported on March 6th. A favorable report, we believe, would increase the probability that WMT would rise to about $55 (the mid-point of its trading range) within the next few months, based on its 1) defensive characteristics, and 2) the potential for profit growth when the economic outlook brightens.
- If Wal-Mart maintains its long record of consecutive annual earnings increases, and achieves EPS of about $4.00 by 2010, we believe WMT shares might approach their all-time high of $70, or move beyond it.
Disclosure: I, Bernard Sosnick, certify that all the views expressed in this research report accurately reflect my personal views of the subject company. I also certify that I have not and will not receive compensation with respect to the issuance of this report.
