Walmart Inc.'s (WMT) Q3 earnings release on Nov. 19 has pushed WMT stock higher since then. This was due to strong earnings and FCF gains. Today, unusual out-of-the-money put options activity is occurring, which could be bullish for WMT stock.
WMT is at $93.89 in midday trading today, up 11.7% since it closed at $84.08 on Nov. 18. However, a Barchart report showed that put options activity over 33 times prior outstanding contracts have traded.
Does this mean that WMT stock has peaked? After all, the stock is now up 22.6% in the last three months after a recent low of $76.64 on Sept. 6.
The answer is maybe not, as the company's earnings were strong, analysts have higher price targets and the out-of-the-money puts could actually be a bullish signal. Let's look into this.
Strong Earnings and FCF
Walmart reported that revenue rose 5.5% year over year, operating income was up 8.2%, and adjusted earnings per share (EPS) gained 13.7%. Moreover, the company raised its guidance significantly and said its full-year adj. operating income will rise by 8.50% to 9.25%.
This was important since the company had previously had forecast lower growth of between 6.50% to 8.0%. In other words, it expects operating income to accelerate.
On top of this, Walmart said its operating and free cash flow (FCF) figures were extremely strong. For example, its operating cash flow (OCF) rose by 20.5% to $22.9 billion and its FCF rose an amazing 44.2% from $4.3 billion to $6.2 billion, both on a year-to-date basis.
This is important since it shows that Walmart's FCF margins are now very high. For example, based on YTD sales of $500.4 billion, its YTD FCF margin is 1.24%, vs. 0.914% last year on $474.7 billion in sales.
Projecting Higher FCF and Price Targets
That allows analysts to forecast higher FCF going forward. For example, analysts now project $705.28 billion in sales next year ending Jan. 31, 2026. So, assuming the company can make an average 1.25% FCF margin its free cash flow could soar to $8.8 billion:
0.0125 x $705.28 billion = $8.816 billion
This means that the amount of cash the company generates could push the stock significantly higher. For example, using a 1.0% FCF yield metric, the stock could be worth $882 billion:
$8.816b est. FCF / 0.01 = $881.6 b est. mkt cap
This is 18.3% higher than today's $744.66 billion mkt cap. In other words, WMT stock could be worth 18.4% more, or $111.17 per share.
Analysts also have higher price targets. For example, Yahoo! Finance reports that 42 analysts have an average price target of $96.04. Barchart's mean target price is $96.74.
In addition, AnaChart.com, a site that tracks sell-side analysts' price targets, reports that 32 analysts have an average target price of $101.70. That is 8.3% higher than today's price.
Recent Put Option Activity
Today's Barchart Unusual Stock Options Activity Report shows that a large volume of out-of-the-money (OTM) puts have traded for expiration on Jan. 10, 2025, just 37 days away.
There were over 5,900 put contracts traded at the $90.00 strike price, which is 4.1% below today's trading price. The midprice of those options was 79 cents.
That implies that the buyer of these puts hopes to see WMT stock by $4.66 to $89.18 (i.e., $3.84 OTM amount + $0.82 premium= $4.66) in the next month. They expect to see a 5% decline in WMT just to breakeven with their investment.
But the short sellers of these puts make a good return. They get to immediately collect $0.79 per put contract shorted. That works out to a short-put yield of 0.88%, or almost 1.0% for the next month (i.e., $0.79/$90.00).
Moreover, their breakeven price is much lower than today's price. The stock would have to fall to $90-$0.79, or $89.21 before the investment starts to incur an unrealized loss. That is almost 5% below today's price. So, there is good downside protection for the short seller of these puts.
Moreover, it allows the short seller to set a potentially lower buy-in price. Given the upside shown above in WMT stock the investor who shorts these puts and then has them assigned can hold on to their shares. They might expect to see WMT stock eventually move higher based on its strong free cash flow and FCF margins.
The bottom line is that this huge WMT put option activity could be a bullish signal for WMT stock.
