Wal-Mart stock rally cools following announced Amazon-Whole Foods deal

Wall Street has been bullish on shares of Wal-Mart Stores through most of 2017 as the retail giant bucked sluggish traffic and same-store sales trends seen in much of the retail sector.

But that rally appeared to hit a wall following Amazon’s move in mid-June to buy Whole Foods. In the past three weeks Wal-Mart shares traded between $74.84 and $76.21, and well below the near-$80 mark it was trending toward ahead of the $13.7 billion Amazon-Whole Foods deal.

Wal-Mart shares (NYSE: WMT) closed Thursday at $75.47, up 15 cents. The company’s market cap was valued at $228.67 billion having lost nearly $15 billion since June 5 when the stock hit $80.26. For the past 52 weeks Wal-Mart shares have traded from a low of $65.28 and a high of $80.47.

While many retail analysts said a serious and immediate threat from the Amazon-Whole Foods was not likely for grocery giant Wal-Mart, shareholders continued to harbor concerns as shares have not regained their recent losses.

PROS AND CONS
Raymond James & Associates analyst Budd Bugatch reiterated his strong buy recommendation for Wal-Mart shares. He said the initial reaction from investors and their fears were likely around Amazon now having a stronger fresh food offering which could strengthen its position and create pressure on Wal-Mart. Bugatch said the sell off by investors was likely overdone for several reasons which included Amazon and Whole Foods not being a new competitor to Wal-Mart. He said the grocery business is highly competitive and low margin, and Amazon’s expansion into grocery could result in margins remaining tight.

“Given the sizable price difference between Whole Foods and Wal=Mart’s grocery business, the standard Whole Foods customer was likely not a significant Walmart grocery customer. … While the overall retail environment remains hyper competitive, Wal-Mart’s focus on improving its customer experience in its U.S. stores continues to gain traction (11 consecutive quarters of positive traffic). Furthermore, after a period of treading water with its e-commerce business, it appears Wal-Mart has switched to offense and is operating at a much faster cadence, illustrated by its recent two day shipping and in-store pickup discount initiatives,” he said.

Bugatch recently said the share price decline is a buying opportunity for investors interested in retail. But not everyone agrees. Stephens Inc. analyst Ben Bienvenue is on the sidelines with his hold recommendation on Wal-Mart shares. He recently said earnings growth remains challenged and until the share price falls further or earnings growth improves he will be neutral on the shares.

“We fear operating margin compression will continue through this year. We will continue to monitor the competitive landscape and would be more constructive on the shares if we saw a path to significant earnings growth,” he noted.

Bienvenue gives Wal-Mart shares a $78 price target based on 17.5 times earnings per share estimates.

Bank of America and Telsey Advisory Group analysts upgraded their recommendations for Wal-Mart earlier this year from hold or neutral positions. The majority of analysts (19 of 33 surveyed by Thomson Reuters) have Wal-Mart Stores rated “hold” as of July 5. Another 10 rate the shares a “strong buy” and either other rate shares a “buy.” The one-year price target was also recently reset to $80.38.

INSIDER LOSSES
Wal-Mart execs see financial gains and losses when the share price shifts because a large percentage of their compensation is paid in shares. Wal-Mart Stores CEO Doug McMillon holds or controls roughly 1,099,654 shares of Wal-Mart as of April 7. In the past month McMillon’s share value is down $5.432 million.

Marc Lore, CEO of Walmart U.S. e-commerce, holds more than 3.576 million shares of Wal-Mart which have lost $17.66 million in value in the past 30 days. Lore’s holdings are substantially more than other execs given they were part of his payment for Jet.com.

David Cheesewright, CEO of Walmart International, has seen the value of his 204,168 Wal-Mart shares decrease more $1 million in the last month. Walmart U.S. CEO Greg Foran’s share holdings are down about $845,000 since over the past month.