With the bull market nearing its sixth year, investors have to be wondering how to evaluate stocks ahead. The Dow Jones Industrial Average (DJIA) gained about 7.5% in 2014, and the S&P 500 Index rose by 11.4%, outside of dividends. Wal-Mart Stores Inc. (NYSE: WMT) turned in above-average performance in 2014, a gain of 11.9%, if you include its dividend adjustments.
24/7 Wall St. has decided to do a bullish and bearish analysis for Wal-Mart and the rest of the DJIA components to see what lies ahead for 2015 and beyond.
After closing out 2014 at $85.88, Wal-Mart’s annual trading range was $72.27 to $88.09. It also ended the year with a consensus analyst price target of $82.22, which would imply an expected negative return of 4.2% this year. Still, there is the dividend yield of 2.3% to consider in this analysis and outlook as well.
The key consideration for this year and the years ahead is that Wal-Mart is by far the king of retailers. It is not just the largest retailer in the world. The company has more than 2 million employees. It also ended 2014 with a market cap of $277 billion, and its shares recently hit another all-time high, after finally breaking above the $80 level.
With a dividend-adjusted performance of 11.9% in 2014, Wal-Mart’s total downside, with the dividend included, in 2015 is expected to be 1.9%. This seems like a low expectation for a bull market, so it is important to review the bullish and bearish cases that could impact the stock.
When we ran the annual bullish and bearish outlook for Wal-Mart a year ago, the expectation was for a gain of almost 6.5%. It nearly doubled that. Could analysts have underestimated Wal-Mart again?
A bullish case for Wal-Mart is that the stock’s breakout above $80 may have just been the start of good things to come. Market technicians expect that chart breakouts are indicative of coming good things. Wal-Mart’s dividend yield of 2.3% also has room for growth. The retailer also avoided the woes of rival Target Corp. (NYSE: TGT) over its massive data breach. Another issue is that Wal-Mart’s quarterly sales have finally started showing signs of life, and it is no longer bashed as much as it used to be over its lacking e-commerce efforts.
The most obvious win for 2015 is that lower oil prices likely will help Wal-Mart enormously. Sure, they sell cheap gasoline and that may lower its gas-pump revenues. But the core retail effort inside of Wal-Mart and Sam’s Club almost certainly is a winner if oil stays low for an extended period. If people are spending $30 and $40 less for a fill-up of their truck or SUV, that money can be redirected to retail giants like Wal-Mart.
The bearish case is that Wal-Mart is also subject to the same economic woes as elsewhere. The rise of the dollar stores has been a secular trend, and the smaller format Wal-Mart stores simply may not be enough to offset the trend or to move the needle. Another key issue is that Wal-Mart is one of the companies that are front and center when it comes to labor woes. Low wages, classifying workers in a way that minimizes benefits, and other issues have plagued Wal-Mart for years.
Then there are other issues that are not yet resolved as being good or bad. Is exchanging gift cards from more than 200 merchants a good idea? Is lower capital spending for growth a good idea? Can Wal-Mart work its way into other nations for more growth ahead? Will consumers use their gas savings to join the likes of Costco Wholesale Corp. (NASDAQ: COST) or go elsewhere? Will a new management team help Wal-Mart in the effort to win more business from American consumers?
Wal-Mart is not an expensive stock at about 16.5 times expected earnings this coming year. It also is likely that Wal-Mart can lift its dividend again. Furthermore, the retail giant has spent billions of dollars buying back stock, and it is likely to continue doing so.
It is impossible to argue that Wal-Mart is not a major part of the economy, just like it is impossible to ignore that its stock finally broke out in 2014. Now investors have to decide whether more good times are ahead.