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Why Should You Buy Wal-Mart After Worst Decline in 3 Decades

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The world's largest retailer Wal-Mart (WMT - Free Report) suffered its worst one-day stock decline in three decades following its fourth-quarter fiscal 2018 results.

The stock tumbled more than 10% at the close of Tuesday’s trading session, representing its steepest one-day drop since Jan 8 1988, and wiping out more than $31 billion in the company’s market value. It trumped its average volume figures, as nearly 52.1 million shares exchanged hands compared with around 9 million on an average.

The mega retailer posted sluggish results for fourth-quarter fiscal 2018 results. Although it beat revenue estimates, earnings fell shy of the Zacks Consensus Estimate by 3 cents. Slowdown in e-commerce sales was the biggest reason for the earnings miss. Online sales grew just 23% year over year, a massive drop from 50% growth seen in the third quarter and 29% growth in the year-ago quarter. This is because Wal-Mart struggled to manage its online inventory, amassing holiday-related items such as electronics, toys and gifts and falling short of stocking everyday items.

The turmoil spilled over to the broader U.S. stock market, shaving off roughly 73 points from the Dow Jones Industrial Average and a 2.3% pullback in S&P 500 consumer-staples stocks. Wal-Mart has been underperforming the industry, having shed 4.7% so far this year against the latter’s 5.6% increase.



However, the dip could be a good entry point given its solid fundamentals. We have highlighted some solid reasons to add the stock to your portfolio at a beaten down price.

Guidance Solid

Despite the slowdown in e-commerce sales, the discount chain is still optimistic as it reiterated its prior guidance of 40% online sales growth for the current fiscal. Additionally, it expects U.S. same-store sales to grow at least 2% and earnings per share in the range of $4.75-$5.00. The high-end of the guidance is above the Zacks Consensus Estimate of $4.91.

High Return on Equity

The discount chain store has a solid track of returning cash to shareholders. After returning $14.4 billion to shareholders in the form of dividends and share repurchases last fiscal year, Wal-Mart lifted its annual dividend by 2% to $2.08 per share, which will translate to a yield of 1.95%. This marks the 45th consecutive year of dividend increases..

As such, Wal-Mart has higher return on equity of 16.92% versus the industry average of 12.40%.

Encouraging Estimate Revisions

Wal-Mart has seen positive earnings estimate revision of 23 cents for the current fiscal over the past three months. For FY18, the Zacks Consensus Estimate is pegged at $4.91, representing double-digit growth from the prior year. Revenues are expected to grow 2.66% year over year.

Additionally, the stock carries a Zacks Rank #2 (Buy) and belongs to a top-ranked Zacks industry (top 41%), suggesting that the worst might be over. It is a triple play stock with a solid Value, Growth and Momentum Score of B each.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Low Beta

Wal-Mart has a lower beta of 0.42, which makes the stock safe and resilient amid the current rocky market. Beta measures the price volatility of stocks relative to the overall market. It has direct relationship to market movements. A beta of 1 indicates that the price of the stock tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile while a beta of less than 1 indicates that the price of the stock is less volatile than the market.

Competitive Position

Although Wal-Mart is trying to catch up with Amazon (AMZN - Free Report) in the online retail space, it is way ahead in the brick-and-mortar retail business. The company also has an edge over another retailer Target (TGT - Free Report) in a fiercely competitive digital space.

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