Is Wal-Mart's Management Creating Value?

Warren Buffett's partner, Charlie Munger, once said, "I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther."

For corporate boards, using bad incentives for management's pay can be disastrous (think Lehman Brothers). Incentives based on singular metrics such as revenue growth, EBITDA, ROE, or earning per share are easily manipulated and gamed. Fortunately, there is a better way: EVA Momentum.

Created by Bennet Stewart of EVA Dimensions, co-creator of EVA (Economic Value Added), Stewart says EVA Momentum is "the only percent metric where more is always better than less. It always increases when managers do things that make economic sense."

For explanations of either term, click here for EVA and here for EVA Momentum.

So what does this mean for investors? The best companies are creating value greater than their cost of capital, as reflected by a positive EVA momentum. The higher the EVA momentum, the stronger management's value creation.

Let's look at Wal-Mart and three of its discount-store industry peers to see how effectively they create value. Here are the EVA momentum figures for each company over several time periods.

Related Companies 2007 2008 2009 3 Year
Wal-Mart (NYSE: WMT  ) 0.03% 0.21% 0.20% 0.46%
Costco (Nasdaq: COST  ) 0.22% -0.27% 0.23% -0.05%
BJ's Wholesale (NYSE: BJ  ) 0.26% 0.1% 0.07% 0.18%
Target (NYSE: TGT  ) -0.1% 0.56% 0.99% 1.67%

Source: Capital IQ and author's calculations.

Of the four discount-store companies, Target's management has been creating the most value, while Wal-Mart places second. Suprisingly, Costco is the only company of the four to actually have negative EVA Momentum, showing that the company has not produced value above its cost of capital.

Businesses with high EVA momentum are effectively creating value. It will be interesting to see how useful this new metric proves to companies and investors. If it lives up to its promise, it will be an essential tool in investors' arsenal.

Dan Dzombak recommends you read The Best Investment Advice You Will Ever Get If You Have Under $100k. He does not own shares in any of the companies mentioned. His musings and articles he finds interesting can be found on his Twitter: @DanDzombak.

Costco Wholesale and Wal-Mart Stores are Motley Fool Inside Value recommendations. Costco Wholesale is a Motley Fool Stock Advisor pick. The Fool owns shares of Costco Wholesale and Wal-Mart Stores. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On October 31, 2010, at 9:09 AM, madmilker wrote:

    Well...from what Lance Winslow wrote in that article..... "The Flow of Trade in a Global Economy."

    ""Now let us look at Wal-Mart again; you buy a product there, 6% goes to the employees, 10-18% is profit to the company, 25% goes to other costs and 50% goes to re-stock or the cost of goods sold. Of the 50% about 20-25% goes to China, a guess, but you get the point. Now then, how long will it take at 433 Billion dollars at year for China to have all of our money, leaving no money flow for us to circulate? At a 17 Trillion dollar economy less than 40-years minus the 1/6 they buy from us. Some say that if we keep putting money into our economy, it would take forever, but if we do not then eventually all the money flow will go. If China buys our debt then eventually they own us, no need to worry about a war, they are buying America, due in part to our own mismanaged trade, so whose fault is that? Not necessarily China, as they are doing what's in the best interests, and we should make sure that trade is not only free, but fair too."

    Looks to me like in the past thirty-five years...it ain't value that they have created in the USA...it's more like a country not being able to get their hands on any George Washington's.

    And with Wal*Mart only putting 5% foreign in their stores in China....

    on Wal*Mart's China web page!

    "Wal-Mart China persists in local procurement which provides more job opportunities, supports local manufacture industry and promotes local economy. So far, 95% of merchandising sold at Wal-Mart China store are local products by which Wal-Mart has established business relations with nearly 20,000 suppliers. At Wal-Mart, we treat suppliers as partners and would like to develop with them. In 2008 Wal-Mart won the Supplier Satisfaction published by Business Information of Shanghai for five consecutive years."

    They making sure th

  • Report this Comment On October 31, 2010, at 9:11 AM, madmilker wrote:

    oops! they making sure the nice people of China can't help in getting all those George Washington's back.

    Fifteen cargo ships pollute as much as 760 million automobiles.

    $9 billion a year in hidden taxes to all American taxpayers to clean fish from ballast tanks of ships...

    think about all those facts the next time you pull that George out of your pocket....

    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.

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