Wal-Mart Earnings Preview: Retail Juggernaut Is Model Of Earnings Consistency

 |  About: Wal-Mart Stores, Inc. (WMT)
by: Brian Gilmartin, CFA

Wal-Mart (NYSE:WMT) reports their fiscal 3rd quarter earnings on Thursday, November 15th before the bell, with analyst consensus looking for $1.07 in earnings per share on $115 billion in revenues, for expected year-over-year (y/y) growth of 10% and 4.5% respectively.

Last quarter, ended July 31, Wal-Mart reported that revenues grew 4.5% y/y while earnings grew 8% and all divisions comp'd positively except entertainment.

There has been a resurgence in the stock price since mid-2011, with a lot of that appreciation coming from what has been a turnaround in US store (Wal-Mart) comparisons (comps) since that time.

Since mid-2011, the stock has risen from under $50 to over $75 as US comps have improved from a -1% to just over +2% in the last 15 months. If you study the trading history of the stock, going back as far as the late 1980's, early 1990's, Wal-Mart went through similar long consolidations where US comps stagnated, only for the stock to break out when US comp growth returned.

In early July, 2012, the stock finally traded above its all-time high hit in December, 1999 of $70.25, and has not re-tested that key level since.

Fundamentally, I've always thought Wal-Mart was one of the great American success stories in a sector (retail) loaded with overnight successes and fast flame-outs, and a very misunderstood company to boot.

Qtr end Rev Gro y/y Op Inc Gro y/y EPS Gro y/y Total comp US comp
10/12 q3 (est) 4.5%   10% 3% 1% - 3%
7/12 q2 4.5% 5% 8% 2.5% 2.2%
4/12 q1 8.5% 8% 12% 3.0% 2.6%
1/12 q4 6% 5% 7.5% 2.1% 1.5%
10/11 q3 8% 5% 8% 1.9% 1.3%
7/11 q2 5.5% 3% 12% 0.0% -0.9%
4/11 q1 4% 2% 10% -0.3% -1.1%
1/11 q4 2% 10% 14.5% -1.15 -1.8%
10/10 q3 2.5% 0% 7% -0.7% -1.3%
7/10 q2 3% 5% 10% -1.4% -1.8%
4/10 q1 6% 11% 14% -1.1% -1.4%
1/10 q4 4% 14% 13.5% -1.6% -2.0%
Click to enlarge

* Data source - internal spreadsheet and SEC filings

As the attached table shows, Wal-Mart has the ability to leverage single digit revenue growth, and US comps have steadily improved since mid-2011, and the stock price has appreciated along with that improvement.

During the 2008 - 2009 recession, a horrific period for business in general and retail specifically, when unemployment soared and consumer spending tightened dramatically, year-over-year revenue growth only decelerated to -1% or -2% during the heart of the crisis. In addition, Wal-Mart never suffered a quarter of y/y earnings declines, which speaks to the power of their distribution model, and their ability to remain flexible with their income statement and balance sheet, which is particularly noteworthy for a company that does $475 billion in sales annually.

Most retail investors don't realize just how big Wal-Mart is:

* Wal-Mart is expected to generate $473 billion in annual revenues in fiscal year 2013 (ends Jan, 2013), and another $496 billion in fiscal 2014;

* In a $15 trillion US economy, where "consumption" (i.e. consumer spending) is 2/3rd's of US GDP, Wal-Mart is approximately 10% of US retail sales;

* Wal-Mart is now the single-largest US employer in the United States, employing roughly 2.5 million associates;

Wal-Mart has long flown under the radar and seems to shun attention, since the company has gained formidable enemies over the years(primarily their competition and others of the union variety), but they are probably less of a retailer and more of a "distribution juggernaut" than the average person realizes. Wal-Mart's "every day low price" (EDLP) strategy necessitates that the company be uber-efficient in the transportation and distribution of their goods, and that they maintain strict control over their suppliers to insure "EDLP" to the American consumer.

To give you some idea of how Wal-Mart can pressure a sector, in the early 2000's, management decided to start selling groceries, which are now almost half of the expected $473 billion in annual sales, or $236 billion in annual grocery sales. That market share came from somewhere, and is one of the reasons, Joe Nocera, the famed business columnist of the New York Times, noted that the Wal-Mart's "every-day low-pricing" could be one of the primary reasons that consumer inflation remained contained during the 1990's.

Trading at 10(x) - 11(x) 4-quarter trailing cash-flow currently, Wal-Mart is not a screaming buy as it was under $60, but the stock isn't very expensive either, given its consistency and dependability of earnings growth. With a 2% dividend yield, and the company buying back between $1 and $2 billion in shares every quarter as part of the share repurchase plan, their formidable cash-flow is being returned to shareholders in an intelligent fashion.

Current analyst consensus is looking for Wal-Mart to generate 5% - 7% annual revenue growth and 10% - 12% earnings growth over the next 3 - 4 years, and I think it would take the earth being hit by a meteor to deviate the company from this uber-like consistency.

Given current analyst consensus earnings estimates, Wal-Mart is trading at 15(x), 14(x) and 12(x) fiscal 2013, 2014 and 2015 consensus, with expected earnings growth of 10% - 12% the next few years - again, not tremendously rich, or really cheap.

Here is the long-term chart of Wal-Mart, showing the recent breakout above the 1999 high. We may buy more shares in front of earnings, but we will likely wait for next Thursday's earnings report. We think Wal-Mart would be a stronger buy near $65 - $67. Our internal spreadsheet values the company between $70 - $80 per share, while Morningstar has an "intrinsic value" on Wal-Mart of $72.

Watch US comp's next Thursday, and watch to see if the stock holds the $70.25 price or December, 1999 high technically.

Click to enlarge

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.