Valuation analysis for Wal-Mart Stores, Inc. (NYSE:WMT)

October 21, 2014, 13:23 pm ET, BY Thomas H. Kee Jr- Editor, Stock Traders Daily| Editor: Thomas H. Kee Jr. (Follow on LinkedIn)

The market has begun to show signs of weakness and investors should understand the fair value of the market and the stocks they own.  This information has already been provided to clients of Stock Traders Daily, and the analysis below is intended to be used conjunction with the fair value analysis for all 30 Dow components to reach a conclusion defining the fair value of the Dow Jones industrial average is at this time.

Since the fourth quarter of 2012 earnings growth at Wal-Mart Stores, Inc. (NYSE:WMT) has been awful.  According to our trailing 12 month EPS growth observations, which exclude onetime events, the trajectory of earnings growth for Wal-Mart has been down aggressively from a peak of about 9.3% to its current level, -2.8%.  This contraction in earnings is a big deal and should be concerning two investors looking for growth.

Interestingly, the PE multiple for WMT during this time of earnings growth contractions has been rock solid.  The stock has traded with a multiple of around 15 times earnings the entire time and although the stock price has done very little for investors over the same time, it has been stable.

Technical take:

According to our real time trading report for WMT the stock has recently tested longer term support and it is already in the process of increasing back towards longer term resistance levels.  The stock has already begun to increase, however, so we would not be buyers of the stock at this level.  We prefer to buy stocks when they test longer term support levels, not in the middle of channels, so because Wal-Mart is currently in the middle of its channel we do not recommend buying WMT at these levels given our combined analysis at this time.

Summary:

A careful review of revenue and EPS growth for Wal-Mart raises serious concerns.  Investors should be worried if they are looking for growth because Wal-Mart seems to be stagnating on a revenue basis, and although EPS growth has recently been negative, we can reasonably expect it to at least flat line going forward as well.  The no growth environment has not yet impacted shares of Wal-Mart, but based on valuation metrics Wal-Mart absolutely looks overvalued at this point.  Its PE multiple of near 15 in no way supports the no growth environment that exists.

However, because the stock has tested longer term support we should expect the stock price to increase to longer-term resistance levels as that is defined in our real time trading report.  At that point, we would absolutely suggest selling Wal-Mart unless something material changes the growth rate that the company has been experiencing.  Thus far we see nothing on the horizon to change that.

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