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Bobby Raines's Analyst Insights

Options Analyst Writer
Bobby Raines
Author Bio

November 11, 2013 - Retail giant Walmart can still provide good value

There are lots of ways to measure the health of the economy. You can measure, employment, unemployment, business spending, consumer credit, consumer spending? You get the idea. Corporate earnings are also frequently considered when people try to determine what kind of shape the economy is in.

Alcoa (AA) was once the bellwether at the start of earnings season. Demand for aluminum is a good way to gauge how healthy the economy is how the thinking went. Other people have pointed to lines in specific earnings reports. Dupont's (DD) production of titanium dioxide, which is used in sunscreen, paint, and a whole host of other applications has also been considered a good indicator of the health of the economy.

As our economy has shifted from one focused on industrial output to one of services and consumption, those measures have faded as worthwhile things to focus on. Alcoa was recently removed from the Dow Jones Industrial Average, and DuPont is selling its titanium dioxide business.

If I had to pick just one company to try to gauge the health of the economy, I'd probably point to Walmart (WMT). As the nation's largest retailer, as well as one of the largest employers, Walmart is probably a better indication of how the average consumer is doing than any other single company.

The big-box retailer is ubiquitous and almost everyone ventures into one at least occasionally. Given the company's status as the nation's largest seller of groceries, Walmart is a pretty regular fixture in the lives of a huge number of shoppers.

So what is the expectation for the retail giant's upcoming earnings? Analysts currently expect $1.13 per share on $116.75 billion in revenue, which compares to $1.08 per share on $113.93 billion in the same quarter of 2012. Those numbers aren't predicting incredible growth, but there is growth there, which is significant for a company of Walmart's size and maturity.

Another sign that should be encouraging for investors is that the company isn't content to stand pat with the strategy that helped it get so large in the first place. Walmart is making a big push to expand its online sales. The company is also experimenting with smaller stores, which should help it open more locations closer to consumers, similar to the strategy that has been successful for Dollar General (DG) recently.

The stock has struggled recently as the company missed earnings estimates in two of the last four quarters, but the company (and the analysts who make those estimates) likely have a better handle on sales and earnings this time around.

Chart courtesy of

The stocks has bounced from near the $72 level each of the last two times it has fallen, so that may be a good point to set up an options trade. The 70/72.50 bull-put credit spread currently yields a credit of about 23 cents, which is a 10.13% return, or 54.39% on an annualized basis. Traders with this position get a full profit so long as the stock closes above $72.50 at January expiration.

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