How Much Is Wal-Mart Worth?

It's the colossus of cost-cutting, the sultan of savings, it's the baron of the blue-light special, it's -- drum roll, please -- Wal-Mart (NYSE: WMT  ) .

Some people love Wal-Mart, others vehemently hate it, and still others couldn't give a darn about the company, they just like the deals they can get at the Walmart and Sam's Club stores. Regardless of your philosophical leanings on the company, though, what we can say is that it's a dominant force in the world of retailing and has delivered impressive profitability and returns on equity for its investors.

Shares of Wal-Mart currently change hands at roughly $52 per share. Is that a good deal? Well, first we need to get an idea of what Wal-Mart's shares are really worth.

It's a beautiful day in the neighborhood
One way to get an idea of what a stock might be worth is to check out how similar companies are valued. So let's take a look at how Wal-Mart stacks up.

Company

Total Enterprise Value / Trailing Revenue

Price / Trailing Earnings

Price / Book Value

Trailing PEG

Wal-Mart

0.6

13.3

2.9

1.3

Costco (Nasdaq: COST  )

0.3

21.1

2.3

1.6

Kohl's (NYSE: KSS  )

0.8

13.8

1.8

1.0

Lowe's (NYSE: LOW  )

0.7

16.8

1.6

1.2

Sears Holdings (Nasdaq: SHLD  )

0.2

26.6

0.8

2.7

Target (NYSE: TGT  )

0.8

14.5

2.5

1.1

Walgreen (NYSE: WAG  )

0.4

13.8

1.8

1.0

Average

0.5

17.8

1.8

1.4

Sources: Capital IQ, a division of Standard & Poor's, and Yahoo! Finance. Average excludes Wal-Mart.

Using each of those averages to back into a stock price for Wal-Mart, and then taking the average across those results, we can come up with an estimated price-per-share of right around $52. This would suggest that Wal-Mart is fairly valued.

A comparable company analysis like this focuses on a stock's valuation in relation to other similar stocks. That means that the results depend a lot on the group as a whole being properly valued.

This brings a number of issues into question. One obvious question is whether the sector as a whole is fairly valued. If an entire sector is undervalued, then a company that shows up as fairly valued in a comparable company analysis is actually likely undervalued.

At the same time, while all of the companies in the analysis are supposed to be comparable, they're not the same. If a company is appreciably better or worse than other companies in the analysis, then an overvalued or undervalued reading, respectively, might not mean as much.

In this case, I happen to think Wal-Mart is a very efficient and well-run company and certainly better than some of the companies in the list. However, I also have a lot of respect for companies like Costco, Target, and Walgreen, so I wouldn't say that Wal-Mart is head and shoulders above the rest of the group.

Collecting the cash flow
An alternate way to value a stock is to do what's known as a discounted cash flow analysis. Basically, this method projects free cash flow over the next 10 years and discounts the tally from each of those years back to what it would be worth today (since a dollar tomorrow is worth less to us than a dollar today).

Because a DCF is based largely on estimates (aka guesses) and it attempts to predict the future, it can be a fickle beast and so its results are best used as guideposts rather than written-in-stone answers sent down from Mount Olympus.

For Wal-Mart's DCF, I used the following assumptions:

2011 Unlevered Free Cash Flow

$16.2 billion

FCF Growth 2011-2015

8.2%

FCF Growth 2016-2020

5.2%

Terminal Growth

3%

Market Equity as a Percentage of Total Capitalization

80%

Cost of Equity

12%

Cost of Debt

5%

Weighted Average Cost of Capital

10.3%

Sources: Capital IQ, a division of Standard & Poor's, Yahoo! Finance, author's estimates.

While most of this is pretty standard fare when it comes to DCFs, the academically inclined would probably balk at the way I set the cost of equity. In a "classic" DCF, the cost of equity is set based on an equation that uses beta -- a measure of how volatile a stock is versus the rest of the market -- and a few other numbers that I tend to thumb my nose at.

But when you get right down to it, the cost of equity is the rate of return that investors demand to invest in the equity of that company. So I generally set the cost of equity equal to the rate of return that I'd like to see from that stock.

Based on the assumptions above, a simple DCF model spits out a per-share value of $73 for Wal-Mart's stock. Contrary to what we saw above, this seems to say that Wal-Mart's stock is significantly undervalued.

Do we have a winner?
The valuations that we've done here are pretty simple and, particularly when it comes to the DCF, investors would be well advised to play with the numbers further before making a final decision on Wal-Mart's stock.

That said, the range of $52 to $73 that we got from the two valuation methods seem to say that Wal-Mart's stock is likely undervalued right now. At the midpoint between the two estimates we get $62.50 -- 20% above today's stock price.

Wal-Mart is a dominant player in the retail arena, a very efficient operator, and is a member of Standard & Poor's "dividend aristocrats." With an apparent discount on its stock right now, this is a stock that I think investors should at least have on their radar. I already own the stock personally, but I'm not against adding more to my holdings at this price.

Do you agree that Wal-Mart's stock is undervalued? Head down to the comments section and share your thoughts.

Even if you're busy buying blue chips for your portfolio, some well-chosen shorts may be just what your portfolio needs.

Costco, Lowe's, and Wal-Mart are Motley Fool Inside Value picks. Costco is a Motley Fool Stock Advisor recommendation. The Fool owns shares of Costco, Lowe's, and Wal-Mart. Try any of our Foolish newsletter services free for 30 days. True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Matt Koppenheffer owns shares of Wal-Mart, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookies were harmed in the making of this article.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2010, at 4:22 PM, madmilker wrote:

    Maybe how much it is worth has nothing to do with how well it is run. Sometimes the best running tractor plows up the wrong pasture.

    It ran the same way a few years ago in Germany and South Korea but today there is not one store in either.

    One needs to understand....Retail makes NOTHING and the consumers of the world is the Boss....even Sam knew that...

    "There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else." -Sam Walton

    Have not the past five quarters in America...same store sales are down....wasn't last quarter the first time in four years same store sales were down at Adsa.

    Maybe you like it from an invest point of view but from what more and more people of the world reading...

    on Wal*Mart's China web page!

    "Walmart entered the Chinese market and opened its first Supercenter and Sam’s Club in Shenzhen in 1996. Currently, Walmart operates a number of store formats in China including Supercenters, Sam’s Clubs, and Neighborhood Markets. As of June 27, 2010, Walmart had 187 units in 99 cities, and created over 50,000 job opportunities across China.

    Walmart China firmly believes in local sourcing. We have established partnerships with nearly 20,000 suppliers in China. Over 95% of the merchandise in our stores in China is sourced locally. Meanwhile, Walmart is committed to local talent development and diversity, especially the cultivation and full utilization of female staff and executives. 99.9% of Walmart China associates are Chinese nationals. All our stores in China are managed by Chinese local talent. 43% of leaders at senior manager level and above are female. In 2009, the company established the “Walmart China Women’s Leadership Development Commission” for driving women’s career development."

    only tells people like me...one is better off investing in their country and putting it back to work cause ....

    Retail makes NOTHING...

    Governments only make MORE DEBT...

    It's time for less of those two and for America to get back to what it does best....MAKE STUFF..

    cause George Washington on that dollar can't help anyone in the United States of America if he is being held in a foreign hand.

    Made In America is the only way out of this mess cause foreign made put US here.

  • Report this Comment On September 10, 2010, at 6:07 PM, TMFKopp wrote:

    @madmilker

    I see what you're getting at here, but frankly what a company is worth and how well it's run are intimately tied and Wal-Mart is a well-run company in my eyes.

    Should Wal-Mart focus more on stocking its stores with American products? If it can find them at similar low prices to what it buys elsewhere, then sure. But what I know is that every time I go to a Walmart store it's packed and it's packed full of people that go there because the prices are better than they can get elsewhere.

    Snubbing China in favor of all American-made goods might be good PR for a while, but Wal-Mart would also very likely lose a lot of its core customer base in the process.

    Matt

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