The death of the endless growth of Wal-Mart Stores Inc. (NYSE: WMT) is finally upon us. That is at least what J.P. Morgan Chase would lead you to believe. The bulge-bracket investment banking firm’s Christopher Horvers downgraded Walmart’s stock to Neutral from Outperform. The firm also believes that this is a $75 stock versus a prior $84 target. While this is a substantial and influential downgrade, a lot of this depends upon the stock market’s ability to march above and beyond DJIA 14,000. It also brings up an argument about taxation and the impact (or lack of impact) on spending as well as macroeconomic issues.
Horvers expects that the new 2% payroll tax will hurt Walmart’s core customers. That argument could note an interesting segue for another debate about consumer behavior under higher taxation, but that is an argument we will save for yet another day. The concern is that the $70 per month or so less per customer will curb spending in general and will hurt Walmart. The call also points that fewer trade-down wins will come Walmart’s way as we saw in the recession. Horvers thinks that the low hanging fruit has been grabbed and the real thesis is that 2012 is the year that was.
What we at 24/7 Wall St. find interesting here is that this is a call not about a trade-down, but a call about less trade and commerce in aggregate. The real question we would want to know is how this will impact Target Corp. (NYSE: TGT) with its perma-match on pricing. The research note talks about Walmart having won from the trade-down economy during and after the recession. That proved to be costly for Target Corp. (NYSE: TGT) as well. It also could impact Costco Wholesale Corp. (NASDAQ: COST) in any hopes of a trade-up. If Horvers is correct then we would consider that the backside of less spending would even read poorly for the king of the dollar stores at Dollar General Corp. (NYSE: DG). Dollar stores won during and after the recession due to the trade-down economy, but then they continued winning by ”reaching up” for more spending dollars. Horvers prefers Target and Costco over Walmart now.
As far as Costco is concerned, its customers are generally much higher income than Walmart and Sam’s customers. Still, if families have close to $1,000 less in after-tax spending dollars per year, then how much will this impact bleed up while it also trickles down? Many economic and market pundits claimed during the election cycle that higher taxes on the wealthy would not have a broad economic impact on spending and consumer behavior. The higher taxes discussed in this downgrade are basically a reinstatement of the old payroll taxes, and arguably this makes everyone pay for their own social security again (or maybe, by our view). Is this a perverted view that at least the dark side of trickle down economics is real?
J.P. Morgan brings up an interesting point. If Horvers ends up being right, let’s just say that today’s downgrade of Walmart should not just be a stock downgrade. It should be a warning of a macroeconomic downgrade. We would also note that this is a larger role-reversal than if this was a downgrading from a firm other than J.P. Morgan. Coming down from a price target of $84 to $75 takes that firm’s outlook from well-above the consensus from Thomson Reuters of about $79.00 to under the consensus price target.
We would caution that maybe things are not as bad for those investors who have been wondering whether or not they should be looking at Walmart as a future stock holding. Walmart posed its first major technical breakout in a decade in 2012 and that was on the heels of a major scandal involving corruption charges in Mexico which could ultimately implicate the very top brass at the world’s largest retailer.
With Walmart shares down over 1% on Monday and again back under $70.00, the 52-week trading range is $57.18 to $77.60. This new price target still implies upside of nearly 8% for investors who decide that Walmart is simply just a stock that went back on sale. There is also that 2.3% dividend yield that is likely to go higher.
If today’s downgrade was at the peak of the run-up like we saw in September or October of last year, we would easily be siding with the research call saying that the stock had run up too far too fast and was discounting many of the risks that could be there. Now that today’s pullback takes the stock back under $70 we are less concerned than J.P. Morgan. We would also point out that Walmart has used $68 as support on three different occasions starting last November.
There is certainly no free lunch when it comes to investing. That being said, sometimes bad news is good news for those willing to take a fresh look at opportunity from a different view than that being dictated on any given morning inside of Wall St. analyst research calls.
Jon C. Ogg