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August 19, 2013

Stock of the Day

Recommendation: D-rated Sell

Welcome to the Stock of the Day for August 19, 2013. Most retailers are hard-pressed to beat Wal-Mart Stores (WMT) rock bottom prices, so even through the recession and gradual recovery the company has maintained its crown as the largest public corporation by sales. Let's virtually visit Wal-Mart and see if its strategy of offering "Every Day Low Prices" is still drawing in shoppers.

Company Overview: Even though it started as a mom-and-pop operation in 1962, Wal-Mart Stores Inc. has since grown into the largest public corporation by revenue. Although it is best known for its Walmart brand name, Wal-Mart Stores Inc. 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 second quarter. On the one hand, net sales climbed 2.4% year-over-year to $116.22 billion. However, analysts had forecast sales of $118.47 billion, so Wal-Mart posted a minor sales miss. Meanwhile, softer business member traffic at its Sam's Club locations and unfavorable currency exchange rates weighed on sales both home and abroad. So compared with Q2 2012, net income barely inched up to $4.07 billion, or $1.24 per share. This also missed the $1.25 consensus earnings estimates. I must also mention that Wal-Mart expects a weaker turnout for 2013. Walmart management lowered its full-year earnings guidance to a range of $5.10 to $5.30 per share. The company also reduced its net sales forecast to between 2% to 3% growth. This is well below the Street view.

Industry Breakdown: Of the 64 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 2.5% dividend yield, which is highest in the industry. In terms of earnings growth, return on equity and long-term growth rate, Wal-Mart ranks in the top 15. But when it comes to sales growth, Wal-Mart falls in the middle of the pack. Wal-Mart's main competitors are Costco Wholesale Corp. (COST) and Target Corp. (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 terrible earnings surprises track record (it has missed the bullseye for the past two 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. As I mentioned earlier, institutional buying pressure for WMT has erroded lately–as shown by its D-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, August 19, 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!

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