Is Wal-Mart Still One of the Best Defensive Plays?
The world’s largest retailer Wal-Mart’s second quarter profit narrowly beat market expectations and the economic bellwether said it would slow expansion in international markets that could impact full year earnings, but analysts tell CNBC they’re positive on the company’s stock and potential for earnings growth.
“Wal-Mart is still one of the best defensive names in this market,” Chris Horvers, Analyst at J.P. Morgan, who is overweight on the company’s stock, said.
The New York-listed firm saw its stock price fall over 3 percent after the earnings announcement Thursday, but the stock is still up over 20 percent since the start of the year. Horvers expects another 10 percent upside by the end of the year.
“Over four months for a low beta defensive stock, we think that’s pretty good,” he said.
Wal-Mart earned $1.18 per share in the quarter, up from $1.09 per share a year earlier. Analysts, on average, expected $1.17 per share, according to Thomson Reuters.
Horvers adds that North America’s back to school season will boost Wal-Mart’s sales in the third quarter, and strong retail trends will continue in the second half of the year.
Slowing International Sales
In the U.S., Wal-Mart’s largest market, same store sales grew 2.2 percent in the second quarter from a year earlier, and while sales in the international market also grew 6.4 percent in the same period, it was a slower increase compared to the first quarter when sales jumped 15 percent.
The slowing growth abroad prompted the retailer’s Chief Financial Officer Charles Holley to announce on Thursday that the company would slow down the opening of stores in Brazil, China and Mexico.
David Strasser, Analyst, Janney Capital Markets, says that’s no surprise and the bigger story out of its earnings release is that the U.S. market continues to strengthen.
“Cutting growth in China, cutting growth in Brazil — those are things, we’ve been harping on them for a long time and I think it’s great,” Strasser said.
“The biggest thing from a stock stand point is them cutting capex [capital expenditure] internationally, people wanted that for a long time and it feels like they’re getting more and more religion around returns … the US continues to strengthen and get better,” he said.
But Strasser adds that investors should take note of the fact that Wal-Mart pointed to the “paycheck cycle” becoming more pronounced globally, not just in the U.S. This means that more people are waiting until the end or beginning of the month to spend showing that liquidity of customers is getting squeezed.
Joe Magyar, Senior Analyst at financial services firm Motley Fool Washington, says Wal-Mart’s earnings may not have been “too inspiring,” but the results have been consistent with other bellwethers and does give positive news about the U.S. economy.
“It does give you a bit of confidence even if they’re not amazing numbers, they are still better than terrible numbers which a lot of stocks are priced for,” Magyar said on CNBC Asia’s “Squawk Box.”
“There is an element of confidence. For a while there was so much concern that the financial crisis has dragged on and it seems we have turned somewhat of a corner…. people have slowly pulled out their wallets,” he said.
Retail sales in the U.S. rose in July for the first time in four months, a sign consumers could drive faster economic growth in the third quarter. Other major U.S. retailers like Targetbeat market expectations with second quarter earnings, while Sears was in line with expectations, as lower expenses offset weak sales.
With people moving away from investing in financials and insurers, Magyar says U.S. retailers with decent results could be a good bet right now.
“People come around to realizing that these are not dead franchises,” Magyar said.
By CNBC's Rajeshni Naidu-Ghelani.