Why Wal-Mart is a buy ahead of earnings

The company should be able to crush expectations as the economy picks up.

By InvestorPlace May 14, 2014 11:56AM

Walmart plastic shopping bags in shopping cart
© ParryGrab/AlamyBy Jonathan Berr

Wal-Mart (WMT) has blamed everything except disgraced Los Angeles Clippers owner Donald Sterling for its lackluster performance for the past few quarters.

Wall Street, to its credit, has grown tired of the excuses -- and that's what makes Thursday's earnings report so important.

With the headline unemployment rate down to 6.3 percent and U.S. consumer confidence at pre-economic crisis levels, Wal-Mart theoretically should be able to crush Wall Street expectations for profit of $1.15 per share on revenue of $116.3 billion -- thin increases on both fronts -- when it reports earnings Thursday morning.

That's the bull's theory, anyway.

Whether new CEO Doug McMillon can deliver the better financial performance that WMT shareholders are demanding remains to be seen.

The least ugly big retailer (right now)

Wal-Mart is a master at shooting itself in the foot. The company has been dogged by criticism of its poor customer service for years. Even the worse, many stores reportedly don't have enough customers to keep shelves stocked.

And seemingly to reflect that, Wal-Mart's sales have stagnated for some time. For example, on a same-store basis, U.S. stores eked out a 0.4 percent gain during the fourth quarter.

Fortunately for Wal-Mart, primary rival Target (TGT) can't exactly capitalize on these blunders right now because it has plenty of problems of its own -- namely, the massive data breach that hit millions of consumers. Meanwhile, same-store sales at Target slumped 2.5 percent in the latest quarter, and Target's botched expansion into Canada is weighing heavily on the company.

CEO Gregg Steinhafel was subsequently sent to the exits, and his abrupt resignation has left a leadership vacuum that needs to be filled.

Amazon.com (AMZN), meanwhile, is steamrolling both companies. The e-commerce giant's revenues surged a whopping 23 percent in the latest quarter, further evidence that sacrificing margins for sales growth will usually pay off. Still, Amazon's shares have been pounded this year amid concerns about its long-term profitability. Amazon is down some 20 percent-plus year-to-date. And Target is off about 6 percent, for that matter.

And Wal-Mart?

Well . . . for as lackluster as things have been, the stock is little changed in 2014. And considering how little is expected out of Wal-Mart, it actually offers a compelling value right now.

The bright side

Wal-Mart faces plenty off headwinds, such as rising minimum wages and accusations of bribery in foreign countries. However, the company has made some smart moves that will pay off in the long run, such as expanding its foothold in financial services by offering money transfers. Teaming up with Wild Oats to offer lower-cost organic food might help attract more health-conscious consumers. And smaller store formats being championed by McMillon might help entice consumers who don't enjoy shopping in cavernous big-boxes.

The stock currently trades at 13 times next year's earnings, which are expected to grow by high single digits. Meanwhile, Wal-Mart also pays a decent -- not outstanding, but decent -- dividend that currently yields around 2.4 percent.

Wal-Mart will never be confused for a growth stock even under the best of circumstances. The company is trading at about a 2 percent discount to its average 52-week price target of $81 . . .  but once Wal-Mart begins to show some progress in performance, those price targets will start ratcheting upward.

Now is the time to buy. Wal-Mart stock might not stay this fairly valued for long.

More from InvestorPlace

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

May 14, 2014 1:19PM
"Why Wal-Mart is a buy ahead of earnings
The company should be able to crush expectations as the economy picks up."

If your brain really worked... you would catch the word "expectations" not the reality of an economy at all. Sell Wal-Mart, they will be closing stores soon... condemning those areas to destitution, if they aren't there already. 
May 14, 2014 2:24PM
Could it be said that Walmart would then become the bellweather of economic recovery. If so, invest in the Chinese shipping companies because they will be the busy ones.
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