Wal-Mart shares up less than 1.5% between shareholder meetings

Wal-Mart Stores Inc. is celebrating 52 years as a retailer, and while the discount juggernaut’s shares are trading around $77, performance has been lackluster for the past 12 months relative to its previous annual gains. Shares have posted gains of 1.43% in value since the annual meeting in June 2013.

The performance pales in comparison to the Dow Jones Industrial Index in which Wal-Mart is listed. The Dow Jones index has returned a 9.59% gain in the same 52-week period. The broader S&P 500 posted gains of 17.26% in the same 12-month period.

The only other retailer in the Dow Jones Industrial Index is Home Depot, which does line up somewhat with Wal-Mart demographically in the U.S. The home improvement retailer’s share gains are also muted at 1.45% over the past 52 weeks. The shares of other discount retailers like Dollar General have also struggled in the past year. Dollar General shares are up 0.43% over the past 12 months.

None of the retailers, including Bentonville-based Wal-Mart, began calendar 2014 with a bang. Wal-Mart shares have struggled since hitting a high of $81.37 in early December on hopes of a solid holiday. Shares are down nearly 3% since January, after a volatile performance in the back half of 2013.

“The retailer blamed harsh winter weather for keeping consumers indoors during crucial months. Now, with summer sales on the way and back-to-school shopping soon to follow, the Arkansas mega-retailer is looking to reverse its fortunes by taking on its competitors. This includes offering discounts on titles Amazon has stopped carrying, because of its ongoing beef with publisher Hachette, and plans to carry more organic goods to compete with Whole Foods, which has seen its stock struggle in 2014,” notes Jonathan Mariano, senior editor and analyst at The Street.

That said, analysts are split on their opinions about the retail giant’s shares. The 20 brokerage houses that closely follow Wal-Mart for Thomson/ First Call have an average target price of $81 for the shares, with a hold or neutral recommendation. Wal-Mart is trading at nearly 15 times projected consensus earnings for fiscal 2015. 

Shares of Wal-Mart stock (NYSE: WMT) closed Monday (June 2) at $76.76, down 1 cent. During the past 52 weeks the share price has ranged from a high $81.37 to a $71.51 low. Shares were trading slightly higher – gains of around 0.2% – in Tuesday morning trading.

Even with the small price gain in the past year, the share price is higher heading into the 2014 shareholders meeting (June 6) than during the same time in 2013. In fact, during the past 10 years, the share price heading into shareholders week has been lower only once (June 2009) than the previous year.

BULLS VIEW
Raymond James & Associates analyst Budd Bugatch recently reaffirmed his “overweight or buy” position for Wal-Mart Stores after the weaker-than-expected first quarter earnings.

Bugatch did lower his target price to $83 from $85 based on sluggish operational performance. The firm also reduced its fiscal 2015 guidance to $5.25 per share on revenue of $486 billion, citing the challenging headwinds from weather, SNAP income adjustments and higher benefits costs under the new health care law.

Wal-Mart anticipates benefit costs to increase about $100 million per quarter, based on higher enrollment numbers for health insurance during the first quarter of fiscal 2015.

“Given Wal-Mart's continued investment in small format stores, commitment to integrating E- commerce with brick and mortar stores, and attractive valuation, we remain constructive on the shares,” Bugatch noted.

ON-THE-FENCE
Brian Gilmartin, a portfolio manager at Trinity Asset Management and contributor to the Fundamentalis blog site, noted just ahead of Wal-Mart’s recent earnings call that he “expects Wal-Mart and retail in general to trade better into the 2014 summer.” He said the shares are fairly valued at $80.

Gilmartin said there is still the lingering Mexican bribery scandal and declining store traffic which has persisted for five consecutive quarters. He said the retailer has been able to compensate for the lower traffic with better pricing or better average ticket.

“The longer-term issues around Wal-Mart are still present and are not under the company's control,” Gilmartin said. 

Noting that Wal-Mart has created more wealth than even Warren Buffett in the last half of the 20th Century, Gilmartin said Wal-Mart is persistently challenged to grow revenues at something more than “low single-digit” percentages in an environment where GDP grows 2% and inflation hovers at 1% to 1.2% annually.

BEARISH VIEW
The Value Investor notes that Wal-Mart continues to woo investors with its 2.5% dividend yield and aggressive stock repurchase plan, retiring shares at a rate of 1% per year.

However, the bears don’t see the recent investments in small format and e-commerce generating enough new sales in the next couple of years to make up for the stagnation that has persisted for some time in its core business. At best the bears note that the handsome dividend yield makes Wal-Mart more of a hedge play than a growth story.

“It is important for Wal-Mart to lower costs in order to increase margins and profits. Its dividend growth was low in the past year, and I am not expecting major growth this year. But it is a good stock with limited risk for defensive investors.” according to Winning Strategies analysts and contributors to Seeking Alpha.

Belus Capital Advisors CEO and Chief Equities Strategist Brian Sozzi has been vocal about red flags he sees in Wal-Mart’s underlying business.

“Not only does buying interest in Wal-Mart shares look foolish in light of the first quarter figures, but it stands to be completely reversed in coming months based on the numerous fundamental disappointments in the quarter from a company that has grown too big to manage properly,” Sozzi noted to investors on May 15.

He also notes that the past five lackluster quarters for Walmart U.S. have been under CEO Bill Simon’s watch. Sozzi said he is unimpressed with Wal-Mart’s underlying business from “missing easy comps to overusing the severe weather excuse.”

“Right into the weak first quarter earnings and second quarter guidance letdown and continued pressure on return on investment are those tech investments online paying off. … This management team is full bore on repurchasing stock,” which Sozzi said he sees as another red flag.