4 Retail Stocks to Watch

Includes: HD, ODP, RSH, WMT
by: Stock Traders Daily

In today’s edition of our “Earnings Radar” column, we want to focus on a few prominent companies in the retail space that are expected to report fourth quarter earnings on Tuesday, February 22. In particular, we want to focus our attention on some retailers that appear to be under-valued heading into their quarterly reports. Similar to a stock finding support on a technical basis, oftentimes a low valuation can provide a floor for a stock as well. Furthermore, these stocks tend to have a lower bar to hurdle and have more leeway when it comes time to report earnings results. Therefore, upside performance of any degree can sometimes act as a potent catalyst to get shares lifting off of their floor.

“Everyday Low Price” for Wal-Mart (NYSE:WMT) Shares

Ironically, shares of the massive retailer that promotes “everyday low prices” at its stores are also available on the sales rack. More specifically, shares of Wal-Mart are trading with a 1-year forward P/E of 12.3 and a P/S of 0.46x. Traditionally, when a retailer is trading with a P/S under 0.50x, it is thought to be in “value stock territory.” In regards to its P/E, the current mean for the S&P 500 is 16.4x, so WMT qualifies in that category as well.

Of course, there is a reason why WMT is trading at a discount. Its growth and performance relative to the Street’s expectations has left much to be desired. For instance, its sales have grown at a pedestrian rate of 2.6% and 2.8% over the past two quarters, coming up short of analysts’ projections. The underperformance didn’t go un-punished, as there have been several analyst downgrades since the beginning of the year.

For the fourth quarter, WMT is expected to report solid year-over-year EPS growth of 27% to $1.31 on revenue of $11.7 billion. One factor that investors should be wary about is the rising transportation costs – an area that WMT has historically had a major competitive advantage in. However, many consumer goods and retail companies have been pressured by rising transport costs, and WMT may also feel the pinch. The good news is, with shares trading at a $54-55 support level, the stock may be able to absorb a small miss. For a full review of WMT’s technicals, we would point readers to our trading report that is available at the end of this article.

“The Shack” Hasn’t Had Investors’ Back

Since October 21, shares of RadioShack (NYSE:RSH) have plummeted some 30%. The primary cause? A slew of analyst downgrades and its dismal fourth quarter guidance issued on January 24, in which it projected EPS of $0.50-0.54 vs. the $0.67 consensus. The company cited weaker-than-expected gross margin in its T-Mobile business due to a higher sales mix of lower margin handsets, combined with increased promotional activity. If that wasn’t enough, RSH also announced that its CEO and chairman was planning to step down and retire in mid-May.

Clearly, there are some fundamental concerns for RSH, but the sharp decline in the stock has created a dirt-cheap valuation. With a P/S of 0.41x and 1-year forward P/E of 8.8x, RSH may be a bargain heading into its Q4 results – especially since everybody is already expecting a bad quarter. As far as estimates are concerned, the Street is anticipating EPS of $0.53 and revenue of $1.37 billion. Another positive to consider is that the stock seems to have found a floor around the $15-16 level. Before entering a position, however, we suggest that readers first review our trading report on RSH, which will provide all the key entry and exit levels you should be aware of.

Can Office Depot (NYSEARCA:OPD) Turn The Corner?

Office supply and equipment retailer Office Depot fell on very hard times during the recession, and has been trying to dig itself out of a hole ever since. To put its struggles into perspective, the company’s sales have declined for at least eight quarters in a row. More than most other retailers, ODP is exposed to the soft labor market given that its customers – especially small and medium sized businesses – don’t order as many supplies when they aren’t hiring.

As with the other companies we are highlighting today, ODP has a cheap valuation, particularly on a P/S basis, which is at a miniscule 0.14x. Not surprisingly, given its low valuation, ODP has been rumored as a takeover candidate in recent weeks. This speculation has helped lift the stock higher lately, but at ~$5.75, ODP is still far below pre-recession levels when it traded in the upper-$30s. Besides its attractive valuation, the stock could find favor with investors and traders as a turnaround play. For this quarter, it is expected to report a loss of $0.03/share, but analysts expect it to turn the corner in FY11, projecting a return to profitability with a $0.06/share estimate.

Home Depot (NYSE:HD) Undergoes A Remodeling

Unlike the other stocks mentioned today, shares of Home Depot have been on a tear, up 36% since the end of last August. Also, unlike the other aforementioned retailers, HD shares don’t appear to be as cheap using a P/E or P/S metric, at 17x and 0.92x, respectively. However, we need to account for the fact that HD is a fundamentally stronger company that also has better growth prospects. Late in 2010, HD’s management commented at its Investor & Analyst Day that sales have been improving across the company and that it is taking market share from competitors. There are a few favorable trends in play: Pent-up demand for home improvements following the recession; improving consumer sentiment; and inability for home owners to sell their homes, who thus are improving their current homes instead.

Considering its better growth performance – its EPS grew 24% year-over-year last quarter – it makes sense to use a PEG ratio to judge its valuation. Using its FY10 expected growth rate of 19%, HD is trading with a PEG of roughly 1.0x. Generally speaking, if a stock is trading with a PEG of less than 1, it is considered to be undervalued, and conversely, a PEG over 1.0x may suggest its over-priced. Therefore, HD’s PEG of 1.0x indicates that HD is fairly valued.

Trading Reports in This Article:

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.