It’s Time to Dump Wal-Mart (WMT, TGT, COST, RTH)

   

Wal-Mart (WMT) was supposed to be the biggest winner of all the retailers in the recession. With almost 10% as the official unemployment number and close to 17% of the country underemployed or unemployed, there is a huge pool of potential buyers that are effectively forced to shop at Wal-Mart — like it or not! Wal-Mart’s earnings numbers from this morning look good on the surface, but the problem is that you have to look at the breakdown of the figures and the projections. When you do, Wal-Mart doesn’t look like the winner of the recession everyone pegged it to be.

The company posted a 22% rise in its profits, but the trade-down effect is either wearing off or is indicative of something far worse to come in the months ahead. The profit was massive at $4.63 billion, and the earnings from operations were $1.17 EPS versus $1.03 a year ago. The confusion here is that Wal-Mart gave disappointing guidance in November of $1.08 to $1.12 EPS versus what was a consensus at the time of about $1.12. So either it sandbagged its data or just was too conservative.

The revenue data is where the ship starts to show its holes. Sales were up 4.5% in total at $113.65 billion, short of a Thomson Reuters figure of $114.36 billion. Wal-Mart’s U.S. same-store stores were down 1.6% excluding fuel sales. The Wal-Mart brand was down 2% while Sam’s Club saw a 0.7% gain. The problem with this is that Wal-Mart had noted before that it could expect as much as a 1% drop. The 0.6% might seem like semantics, but you have to consider that Wal-Mart currently does over $100 billion on average on each quarter’s revenues. Suddenly 0.6% is close to $2.5 billion on an annualized basis, more than many large retailers have for annual sales.

The blame game points to lower prices of groceries and electronics, which have been growth areas. It turns out that a lack of inflation food prices and increasing lower computers and flat panel TV sales takes a toll.

The guidance is concerning and frankly lends more and more credence to Wal-Mart being just back to dead money. Wal-Mart now expects U.S. same-store sales to come in flat, plus or minus 1%. Earnings were put at $0.81 to $0.85 EPS, short of the $0.85 expected from Thomson Reuters. And for the coming year, Wal-Mart sees earnings at $3.90 to $4.00, so its mid-point is just shy of the $3.97 Thomson Reuters consensus. So far during earnings we have seen companies sell off on good guidance, and the guidance here just offers very little upside hope for investors.

Target Corp. (TGT) has actually seen same-store sales improve, and it seems that the customer defection there has abated. There is a sentiment change this week as UBS raised Target’s rating to “Buy” with a $54 target, implying about 13% from the dividend-adjusted close the day before.

Costco Wholesale (COST) is down in sympathy today. It probably shouldn’t be. Sam’s Club was the one bright spot for Wal-Mart, and it is the biggest competitor of Costco.  The company’s finances are improving enough to the point that S&P lifted its corporate credit rating this week to “A+” based in part on its profitability.

Guess which retail giant makes up over 20% of the Retail HOLDs (RTH) ETF?  Yep, Wal-Mart.

For Wal-Mart stock to rise, the company is going to need to become even more shareholder friendly. A call for a significant dividend hike here is what this will take. If Wal-Mart wants new shareholder loyalty, it is going to have to buy it via a very nice dividend. Share buybacks are controversial, and whether they are a good use or poor use of shareholder capital just depends on whom you ask.

Wal-Mart stock is down $0.94 or 1.75% at $53.12 in late morning trade. The stock should be off more. If you go back and review the trading tape, Wal-Mart has failed every time to get much above $54 and then $55 in February, January and December. For most of the last five years, the stock has traded between $45 and $55, and it was unable to stay up in the $55 to $60 range. On average, analysts have a price target just north of $60.00.

The latest price action represents a failure of its 50-day moving average at $53.65, and that was support from December into January and then became resistance after the middle of January. Its 200-day moving average is down at $50.91, and if the charts of the past hold up, then Wal-Mart may need to go flirt with that level in the coming days to weeks.

Does this mean that Wal-Mart is going to kill your money? Probably not. But it isn’t likely to make you much money either. Unfortunately, Wal-Mart needs to go back closer to $50.00 before anyone is likely to get excited about Sam Walton’s legacy.


Article printed from InvestorPlace Media, http://investorplace.com/2010/02/time-to-sell-walmart-wmt-tgt-cost-rth/.

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