(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
Walmart Inc.'s (WMT) stock has been in rally mode since the end of June with shares rising by more than 10%. Now shares may climb even higher. Some options traders are betting shares will rise by as much as 10% over the next few months.
Investors turned bullish on the retailer after it posted robust fiscal-second-quarter results. Walmart saw its strongest comparable sales growth in over 10 years. That sent shares of the stock soaring. Earnings beat analysts’ estimates by more than 6% while revenue came in almost 2% higher. Even better, the company boosted its full-year forecast and comparable sales guidance.
The strong quarter resulted in at least some options traders betting the stock's recent rise is the start of more to come. The options set to expire Oct. 19 have seen the most activity. The open interest for the calls at the $100 strike price has climbed to almost 14,000 contracts, up from almost 2,000 on Aug. 17. For the buyer of those calls to earn a profit, the stock needs to rise above $101 if holding the options until the middle of October. That is an increase of more than 6% from the current price around $95.25.
Some traders are betting shares will rise even higher, with almost 10,000 open call contracts at the $105 strike price. The stock would need to rise to more than $105.25, for a buyer of the calls to break even if holding until expiration. That is a gain of more than 10%.
Upping Price Targets
Analysts also see the stock rising, with the average price target for the retailer at $103.50, about 9% higher than the current price. That price target has increased from $94.50 since the end of July.
Analysts have also increased their full-year fiscal 2019 earnings estimates. Earnings are forecast to grow by 10% in 2019 to $4.85, which is up from prior views of $4.82. Meanwhile, revenue estimates for the next three years rise slightly.
Earnings in 2020 are forecast to be flat, rising to $4.87 per share, while 2021 estimates are forecast to increase by 6% to $5.18. But those estimates are worse than the prior forecast. Prior estimates had called for 2019 earnings of $5.01 and $5.28 for 2021. The rising revenue and falling earnings estimates suggest costs may be on the rise.
For now, the outlook for Walmart appears to be bullish. That is not to say potential problems do not lurk further down the road. Especially if costs rise, as estimates for later years suggests.
Michael Kramer is the founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.