Market Overview

Brian Sozzi Upgrades Wal-Mart, Should You?


Brian Sozzi of Wall Street Strategies is out with a research report on Wal-Mart (NYSE: WMT) after it reported earnings this morning that were better than what Wall Street was expecting.

The Bentonville, Arksansas-based company reported second quarter earnings of $1.09 per share on $109.37 billion in revenues. Wall Street had been expecting earnings of $1.08 per share on $108.3 billion in revenues. The company raised full year 2012 guidance, going from $4.35-$4.50 per share to $4.41-$4.51 per share. The Street is expecting earnings of $4.47 per share.

In his note, Sozzi wrote, "As we have consistently stated since our Sell rating went into action in December 2010, any indication that life was being breathed back into the U.S. division would trigger a less negative view on the stock. We were willing to forego some upside resulting from when such a monumental day surfaced (turn in the business), just so long as there was data and associated commentary to support an opinion that Wal-Mart U.S. was extracting itself from a two-year comp sales slumber."

Sozzi went on to say, "When all is said and done, Wal-Mart U.S. notched a -0.9% comp, significantly underperforming every single competitor in the discount retail space, from dollar stores right on down to Target (NYSE: TGT), Costco (NASDAQ: COST), and BJ's Wholesale (NYSE: BJ)."

Sozzi pointed out such positives as July traffic and ticket sales were positive, and year over year inventory growth improved.

Sozzi notes, "Wal-Mart continued to find areas to manage expenses lower, so if comps do reach positive in 4Q12 there stands to be nice leverage."

He went on to say that, "International by and large was mixed, with Mexico and Brazil on the disappointing side due to investments in EDLP and competitive market forces. That being said, the Wal-Mart investment thesis continues to be U.S. centric; if one believes the U.S. is rounding the deep, dark corner than now is the moment to become interested. For us, we think there are reasons to view the stock in a more positive light at present valuation and considering the U.S. commentary/aforementioned tidbits of interest."

As such, Sozzi upgraded the stock to Hold and raised his price target to $53.

On the conference call, the CEO, Bill Simon, said that the economy continues to be challenging for its core customer, although June and July were better than May. The company also said that customers are trading down to lower priced items and cutting back on discretionary purchases.

It is clear that from the conference call, that Simon and the rest of his team are seeing an influx of shopping, as he mentioned that July same-store-sales were positive, something the company has not seen in quite a while. It has had a tough time since 2009, when the equity markets started to rebound and the economy came out of a recession.

With the U.S. economy in a slow growth phase, companies like Dollar General (NYSE: DG) and the rest of the dollar stores are eating Wal-Mart's proverbial lunch. However, we have begun to see more volatility in recent weeks, and volatility helps companies like Wal-Mart and the dollar stores, as customers tend to try to get the most bang for their buck. Wal-Mart noted the uptick in traffic in July, and that started to coincide with the volatility being seen around the world, particularly in the U.S. regarding the debt disaster.

Perhaps it is time to take a look at this retail behemoth. Low prices are a slogan, not a mantra for your portfolio.

Posted-In: Analyst Color Earnings Long Ideas News Guidance Short Ideas Upgrades Price Target Best of Benzinga


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