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4 Ways To Play Wal-Mart's Historic Crash

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4 Ways To Play Wal-Mart's Historic Crash

Shares of Wal-Mart Stores, Inc. (NYSE: WMT) plunged 10 percent recently after the company issued three-year guidance that fell well short of expectations.

As Wal-Mart continues to search for ways to adapt to the modern digital age, traders are looking for ways to profit from the drop.

The Numbers

Following Wal-Mart's Annual Meeting for the Investment Community, Sterne Agee CRT analyst Charles Grom broke down Wal-Mart's key revelations:

  • Fiscal 2015 sales growth is projected to be zero.
  • Sales growth over the next three years is expected to be 3-4 percent, implying a $45-60 billion increase in revenue.
  • EPS in fiscal 2016 is projected to be down 6-12 percent compared to 2015.
  • Wal-Mart doesn't expect to breach 2015 EPS levels again until 2018.
  • Capex levels for 2016-2018 are projected to be flat at $11 billion annually.
  • The board recently authorized a $20 billion two-year share buyback program.

Of all those details, the 6-12 percent EPS decline in 2016 was likely most troubling to the market and sent shares plunging.

Related Link: Wal-Mart On Pace For Worst Day In Years Amid Lowered Forecast, $20 Billion Share

The Plan

Wal-Mart acknowledged that it is now vying against lower-cost competition and companies that offer a more dynamic customer experience. In order to compete with new low-cost rivals such as Amazon.com, Inc. (NASDAQ: AMZN), Wal-Mart plans to make heavy investments in improving its customer experience over the next several years.

The company has added 800 new sales managers to improve customer service. It also intends to invest heavily in technology to improve its e-commerce sales.

Online sales currently make up less than 3.0 percent of Wal-Mart's total sales.

Buy The Dip?

With Wal-Mart's PE and forward PE now resting comfortably below 13, there's a case to be made for buying the dip. However, if there's one thing that is clear from Wal-Mart's investor meeting, it's that the company seems to be struggling to find a path forward in the digital age.

The company appears to be taking an aggressive approach, and it may very well work out in the end. However, the next two to three years look murky at best. The execution of Wal-Mart's plan will ultimately prove whether the stock is currently a value or a value trap for investors.

What To Buy

While Wal-Mart attempts to get its ducks in a row, there are several other quality Wal-Mart competitors in the retail space that have also been sold off in the market following Wal-Mart's report, including Costco Wholesale Corporation (NASDAQ: COST), Dollar General Corp. (NYSE: DG), Dollar Tree, Inc. (NASDAQ: DLTR) and Target Corporation (NYSE: TGT).

Perhaps analyst Brian Sozzi summarized Wal-Mart's problems best by saying that the company has underpaid its workers for years and "neglected" its online business all in the name of higher profits.

If those two issues are the true source of Wal-Mart's woes, then the other retailers mentioned above have nothing to worry about, and Wal-Mart's problems are more related to a company-specific stubbornness than a wide-reaching retail trend.

While Wal-Mart spends the next couple of years righting the ship, these other companies may have a rare window of opportunity to gain share from the retail giant, and buying these four stocks on the Wal-Mart dip could be a shrewd trade.

Disclosure: The author holds no position in the stocks mentioned.

Image Credit: Public Domain

Latest Ratings for WMT

DateFirmActionFromTo
Aug 2019MaintainsOutperform
Aug 2019MaintainsOverweight
Jul 2019Initiates Coverage OnBuy

View More Analyst Ratings for WMT
View the Latest Analyst Ratings

Posted-In: Brian Sozzi Charles Grom Sterne Agee CRTAnalyst Color Long Ideas Analyst Ratings Trading Ideas Best of Benzinga

 

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