Walmart reports earnings this week - critical read of consumer

WalMart (WMT) reports earnings later this week, and unlike Exxon-Mobil which some people think is the key stock for this market given that XOM is the largest market cap name in the best performing sector of the past three years, I think WalMart is the key "tell" for this market, given its importance in deciphering the behavior of the US consumer.

Most people failed to notice that on the day that the Dow closed above 14,000 and the S&P 500 closed at 1,555, was the same day that WalMart announced June comp's that were 2% - 3% versus the less than 1% expected, which was a pleasant upside surprise that Thursday morning, July 14th (I think that was the date of the most recent highs.)

The point is that consumption is 2/3rd's of GDP, and WalMart accounts for 10% of all retail sales in a year, thus if mortgage worries and higher gas prices and consumer confidence were to impair the consumer to any great degree than the equity market is currently discounting, it would likely show up in WalMart's revenues, earnings, comp's and guidance.

My own personal opinion is that WalMart is a cheap stock: trading at 9(x) earnings for a mid-single-digit earnings grower, and just .5(x) 4q trailing sales (yes, WMT is trading at a market cap that is close to half of its 4q trailing sales) and just 11(x) cash flow from operations, with a AA-credit rating indicative of a solid balance sheet , I consider the stock to be a safe haven not only within retail but within the large-cap sector in general.

WMT as an investment is now the antithesis of what it was in the late 1990's: it is unloved, with few advocates on Wall Street pushing the stock, and it gets bashed with unrelenting frequency (and rather unjustifiably in my opinion) when the press needs a capitalist fall-guy to pick on for a story.

After reaching a high of $70 per share in late 1999, early 2000, the stock has traded as low as $40, but it has essentially been trapped in a 7 - 8 year trading range. Although we are currently long the stock and consider WMT a core position in our client portfolios, I am waiting for the stock to take out $50 per share on heavy volume, before we add to the name.

Current analyst consensus for this coming week's earnings report is $0.77 per share and $92.7 bl in revenues for year-over-year growth of 7% and 8.5% respectively, thus coming into this week's results, expectations are tempered.

One interesting aspect of WMT's fundamental story is the growing importance of the international operations to the core business: once just a single-digit percentage of revenues and operating income, WMT International is now higher than 20% of total revenues while international operating income as a percentage of WMT's total operating income gravitates above and below the 20% figure. (Frankly given that investors and strategists are falling all over themselves to have international in their portfolios, I thought WMT would have been afforded a higher multiple for its international growth, which has averaged between 10% and 30% the last five years (i.e. WMT's international operating income has varied between those two figures since the early 2000's.)

To conclude, WMT is a company that generates $350 bl in annual revenues, which is a truly remarkable figure when you come to think of it, and they have achieved this success by having one single mantra: be the low-price retailer to their customers, and they have managed to accomplish this by assembling a coordinating a logistics and distribution network that would put the US Army and National Guard to shame. (Rumor has it that just after Hurricane Katrina devastated New Orleans, WMT's trucks were the first to penetrate the devastation and get to their stores. Joe Nocera, who writes the main column for the New York Times business section Saturday edition once wrote that WMT could be the single biggest reason inflation remained contained during the 1990's.)

I don't know, nor want to speculate that this week's earnings report will push the stock higher, and above key technical levels, but WalMart will give us some good clues to the state of the US consumer, and how this mortgage crisis is impacting mainstream America.

position in WMT, XOM