How to Play Wal-Mart's Earnings

On the back of solid gains yesterday, stocks opened roughly flat this morning, with the S&P 500 (SNPINDEX: ^GSPC  ) down just two points and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up a nominal seven points as of 10:15 a.m. EST.

Attention, value shoppers
While the retailing sector got a lift yesterday from the news that Office Depot and OfficeMax are in merger talks, Wal-Mart (NYSE: WMT  ) shares fell 0.8%. Granted, given its size (its market capitalization is $230 billion), no one is likely to be acquiring the "Bentonville behemoth" anytime soon, but there are other factors at play.

Yesterday's decline followed a difficult Friday, during which Wal-Mart's stock fell 2.1% on a report from Bloomberg News concerning a leaked internal email that referenced February sales. In the email, dated Feb. 12, Wal-Mart vice president of finance and logistics Jerry Murray wrote to some colleagues: "In case you haven't seen a sales report these days, February MTD [month-to-date] sales are a total disaster, the worst start to a month I have seen in my ~7 years with the company."

Bloomberg also cited a Feb. 1 email from another executive, who complained [my emphasis]:

Have you ever had one of those weeks where your best- prepared plans weren't good enough to accomplish everything you set out to do? Well, we just had one of those weeks here at Walmart U.S. Where are all the customers? And where's their money?

None of this bodes well for the earnings report on the fiscal fourth quarter ended in January, which the company releases tomorrow morning. These are the Wall Street consensus estimates Wal-Mart is up against:

 

Earnings per Share

Revenue

Analysts' estimate

$1.57

$128.9 billion

Implied year-on-year growth

9%

4.6%

Source: S&P Capital IQ.

The leaked emails referenced above suggest that an earnings miss is eminently possible, as analysts may not have had the means to adjust their estimates -- after all, the emails did not quantify any shortfall. If that's the case, the shares could decline tomorrow, particularly if executives indicate that weak demand is an ongoing problem. For value-oriented investors with the patience to look beyond the next quarter, that could provide an opportunity; trading at 13.2 times estimated EPS for the next 12 months and paying a 2.3% dividend yield, the shares don't look like a bad bargain in this environment.

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