3 Reasons Wal-Mart Was Just Downgraded At Bank Of America

• Wal-Mart Stores, Inc. WMT shares have been declining steadily so far in 2015, and are down 31 percent year-to-date.
• BofA Merrill Lynch’s Robert F. Ohmes downgraded the rating on the company from Buy to Neutral, while reducing the price target from $85 to $65.
• Wal-Mart’s earnings are likely to come under significant pressure beyond 2015 due to the company’s investment plans, Ohmes mentioned.

Wal-Mart announced that its EPS would continue to be under significant pressure through FY19. The company indicated that earnings would be severely impacted beyond this year by extended investments in:

1. People - including store level wages, hours and employees
2. Technology - e-commerce in particular
3. Price - may make price investments of several billion dollars over the next 3 years

The EPS estimates for F2016, F2017 and F2018 have been reduced from $4.45 to $4.40, from $4.70 to $4.00 and from $5.00 to $4.10, respectively, “to better reflect WMT’s commitment to investing for the long-term,” analyst Robert Ohmes said.

Wal-Mart has plans to grow sales by $45-$65 billion over the next 3 years, at a CAGR of 3-4 percent. Ohmes added, however, that earnings are expected to decline by 6-12 percent in F17, record flat to modest growth in F18 and return to about 5-10 percent growth in F19.

Over this period of three years, the company expects to generate about $80 billion in cash, which it would use towards company growth, dividend growth and share repurchases. Wal-Mart has announced a new share buyback authorization of $20 billion over the next 2 years.

“WMT U.S. has maintained its return to positive comps and traffic, with momentum in general merchandise (apparel continues to perform well) and improvements in grocery and consumables trends. However, profit headwinds should more than offset potential sales upside as WMT pursues announced strategic priorities,” Ohmes wrote.