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Why Walmart May Have Shocking Results

Introduction

Walmart Inc. (WMT) will report its fiscal second-quarter results on Tuesday, August 18, before the start of the trading session. It isn’t expected to be a stellar quarter for the retailer with earnings anticipated to have declined by 1.6% versus the second quarter of last year. In comparison, revenue is forecast to have risen by 3.7%. The mixed results could be one reason why the stock has struggled to advance against a robust level of technical resistance. It may also be why the shares fall by as much as 10% in the weeks following those results.

The stock has seen its shares rally by roughly 30% since the March lows, which is underperforming the broader S&P 500’s climb of about 53%. The underperformance is a bit of a surprise, considering the company’s enviable position as a result of the pandemic and the healthy growth of its e-commerce business.

An Inflection Point

The chart may tell the story the best, with the equity rising in a long-term trading channel that formed in June of 2018. The channel has created a series of well-defined higher highs and higher lows. But now the stock finds itself at an inflection point, unable to advance past a healthy level of technical resistance at $133. Walmart has hit that price on a few occasions since the beginning of April. However, it has been unable to push through. Now, the shares could drop to the lower end of the channel to around $120, a decline of nearly 9.5%.

Options Are Not Pricing In Big Move

The options market is not predicting a colossal move for Walmart following results. The options for expiration on August 21 have an implied volatility of about 42%. That suggests that the stock could rise or fall by roughly 5.8% from its price of $132.86 on August 14. It would place the shares in a trading range of approximately $124.90 to $140.30 by the end of the week. The last time the company reported results on April 30, the shares dropped just 1.6%.

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Looking Forward

Revenue for the second quarter is estimated to be $135.25 billion. However, many investors will key in on the company’s growth in its eCommerce unit. In the first quarter, the eCommerce unit saw a blistering increase of 74% versus the prior year. Investors may turn their attention to any forward guidance the company may provide. In the first quarter, the company pulled its full-year outlook. Analysts currently estimate revenue for the third quarter at $131.83 billion.

Earnings for the second quarter are estimated at $1.25 per share, down from $1.27 per share last year. The estimates for the second quarter have come up over the past two months from around $1.23 per share. Analysts currently forecast earnings in the third quarter of $1.15 per share, which is down from $1.16 in the third quarter of 2020.

If the company can manage to surprise investors and deliver better than expected results, then there is no reason why the shares can’t punch through resistance at $132 and go on to make new highs. But with the company already trading at a forward PE ratio of 23 and a 5-year expected PEG ratio of 4.7, the shares are not cheap. It means the company will need to post blow out results to have the stock achieve those record highs.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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