There are lots of earnings reports and economic data out today, and the best I can say is that any green is a pleasant surprise. It's not that I was looking for a bloodbath but after Wal-Mart (NYSE:WMT) reported I was sure there could be some profit taking by traders and mostly rubber-necking by would-be buyers. There is also the issue of leadership, which is sorely missing today and a mystery for tomorrow. The good news is there weren't any disasters today. There is much to chew through but when it's said and done the news is okay.
More Color on Wal-Mart Earnings
By: Brian Sozzi, Research Analyst
This morning we posted a pre-market note detailing the 4Q earnings results from Wal-Mart (WMT). Since then we have had more time to chew on the results, as well as the comments we are hearing out there by those influential on the stock. Most are focusing the debate on Wal-Mart's 4Q comp miss relative to estimates, and 1Q comp/earnings guidance below where some were centered. However, we believe an overarching focus on a one quarter comp miss (which was derived from product deflation that is now abating rather than share loss on a global scale) and 1Q guidance misses the essence of what was in the report. In our view, there is a bigger picture to keep in mind when it comes to Wal-Mart, a picture that is bright.
What we see beneath the headline murmurs:
* A company generating higher profit for each dollar of sales.
* A company that returned to total sales growth in 4Q.
* A company that had a profit ramp on a y/y basis in each quarter of calendar 2009.
* A company that is likely to maintain its gross margin gains from last year and maybe even expand gross margin further going forward. Wal-Mart has brought its gross margin to a range of 24.0% to 25.0% from a once historical range of 20.0% to 23.0%.
* A company transitioning to maximizing its operating expense leverage. By indications of the successes realized on the gross margin line in recent years and programs well underway for the current fiscal year to drive efficiencies, operating margin expansion is quite probable as comps turn positive as soon as 2Q.
* A company increasingly sourcing its products from China, and having an opportunity to expand private label merchandise margins through direct sourcing.
* A company having a durable competitive advantage relative to others in an inflationary environment as a result of unmatched buying leverage and efficiencies flowing from a privately owned truck fleet.
* A company likely to see a trade back up the merchandise price curve (from opening price-point) going forward. It's critical that Wal-Mart sees this trade up as these products, on balance, are not the lowest priced relative to the peer set. Wal-Mart has marketed its EDLP message strongly, so customers believe all products are at rock bottom prices.
* A company with a growing international presence (about 25% of sales at the moment)
In the end, we believe Wal-Mart is on a trajectory to grow earnings in excess of 10% in FY11 through a mix of modest gross margin expansion and more definitive operating margin expansion. We are valuing shares of Wal-Mart on a PE multiple of 15.0x (currently trades at about 13.0x consensus EPS), rendering a price target of $61.00.