A UBS Analyst Explains Why Wal-Mart Has Been Downgraded

Shares of Wal-Mart Stores, Inc. WMT saw a major slump in early trade on Thursday after analysts at UBS downgraded the stock to Neutral from Buy. Michael Lasser, analyst at UBS, was recently on CNBC to discuss why his firm downgraded Wal-Mart.

“This is about valuations, the stock’s had almost a two multiple points expansion in the last month, really on the heels of the drop in energy prices, that’s going to be some benefit for Wal-Mart given its customer base, but we think it’s priced in at this point,” Lasser said.

On what if gas prices continue to fall, Lasser replied, “Let’s put some numbers around it. Let’s say that the windfall to the aggregate consumer spending is about $50 billion because for every 1 penny of decline in price of gasoline, it’s about a billion dollars. So, that’s 50 cents of a drop. Wal-mart represents about 6.5% of total retail sales, so if they maintain their pro rata portion of what is likely to be spent from the windfall, it’s about $2.5 billion.”

“The stock, the market-cap of the company has expanded by $25 billion over the last month, suggesting that it’s putting a multiple of 10 times of incremental revenue that they can potentially get and at this point I think, that fully reflects the positive impact.”

When asked whether he is optimistic on the ongoing holiday shopping season, Lasser replied, “I am, but, I think the signs that we have seen is that the retail landscape is getting more competitive, the bar to entice a customer in any store has only [structurly] moved higher […]”