WMT – Watch Out For a Falling Stock Price at Wal-Mart

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Welcome to the Stock of the Day!

Everyone knows Wal-Mart (WMT) for its “Every Day Low Prices,” but shareholders didn’t bargain for a Q3 earnings report that would also send share prices tumbling. But with Black Friday just around the corner and the stock going ex-dividend next month, could this pullback be a buying opportunity?

Let’s talk about it right now.

Company Overview

Even though it started as a mom-and-pop operation in 1962, Wal-Mart has since grown into the largest public corporation by revenue. Although it is best known for its Walmart brand name, Wal-Mart is actually responsible for 55 brands of discount department stores across 27 countries. Wal-Mart has the largest private workforce in the world; it employs over 2.2 million individuals across more than 10,800 locations worldwide.

Earnings Buzz

Wal-Mart reported mixed results for the third quarter. On the one hand, net sales climbed 1.7% year-over-year to $115.69 billion. However, analysts had forecast sales of $116.84 billion, so Wal-Mart posted a minor sales miss. A competitive retail environment and unfavorable currency exchange rates weighed on sales both home and abroad.

Meanwhile, net income inched up 3% to $3.74 billion, or $1.14 per share. This topped the $1.13 consensus earnings estimate. However, Walmart management slashed its full-year earnings guidance to a range of $5.01 to $5.11 per share. This is well below the Street view of $5.20 per share.

Industry Breakdown

Of the 24 companies in the Discount Variety Stores industry, Wal-Mart is the largest in terms of market cap. The company also stands out in terms of its 2.4% dividend yield, which is third highest in the industry. In terms of earnings growth and return on equity, Wal-Mart ranks in the top 10. But when it comes to sales growth and long-term growth rate, Wal-Mart falls in the middle of the pack.

Wal-Mart’s main competitors are Costco (COST) and Target (TGT); currently, COST pulls of the highest rating as a C-rated hold. Meanwhile, TGT and WMT are both downright sells. I’ll discuss what is up with Wal-Mart shortly, but Target has a mixed earnings surprises track record (it has missed the bulls eye for two of the past three quarters) and is suffering from anemic sales and earnings growth. Institutional investors have caught onto this, so buying pressure could hardly be weaker for TGT (or for WMT, for that matter).

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Institutional buying pressure for WMT has eroded lately–as shown by its F-rated Quantitative Grade. This is very important because it suggests that WMT has a poor risk-to-return ratio. And on the fundamentals side, there is ample room for improvement.

Currently, Wal-Mart receives C- and D-ratings for six of the eight metrics I graded it on, including sales growth and earnings growth. The exceptions are its A-rated return on equity and its B-rated cash flow. So WMT receives a C for its Fundamental Grade.

Bottom Line

As of this posting, November 15, I consider WMT a D-rated Sell.

Would you like to check the fundamentals backing up one of your stocks? For more stock grades, please visit my Portfolio Grader website!