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Wal-Mart Stores, Inc.
WMT - One Layman's Perspective

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By MisterMarket
June 10, 2005

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In Q4 of 2004, I began seriously investigating WMT, among a few other securities. Below, I have posted selected portions of my general analysis, which has been shared in more detail with a few money managers in my local area. I welcome comments and updates, since my numbers were generated prior to the publication of the most current annual report.

I should like to begin with a quote from one the investment luminaries that I have benefited from greatly, Ben Graham. On the role of a security analyst (which should serve regardless of whether one is a layman or professional), Graham had the following to say in his legendary book, The Intelligent Investor:

"Beyond the examination and evaluation of stocks, the security analyst deals with the past, the present, and the future of any given security issue. He describes the business, he summarizes its operating results and financial position, he sets forth its strong and weak points, its possibilities and risks; he estimates its future earning power under various assumptions, or as a "best guess". He makes comparisons of various companies, or of the same company at various times. Finally, he expresses an opinion as to the attractiveness as a purchase, if it is a common stock. The security analyst develops and applies standards of safety, which relate primarily to past average earnings, but they are concerned also with capital structure, working capital, asset values and other things."

With that, I have my own general series of guidelines that I follow when beginning the investment analysis process, which is largely summarized as follows:

WAL-MART STORES, INC. (WMT)

Wal-Mart Stores, hereafter WMT, is the world's largest retailer, which supports WMT's market-share and mind-share dominance. WMT's quality management is further supported by the company's financial results, not just recently, but for the recent years past. WMT's business is rather straightforward consisting of operating various channel retail stores worldwide. WMT's competitive advantages include, among other things, its brand name, brand-quality and market-share. WMT's durability is supported by annually increasing sales, earnings and dividends, not just recently, but for the last seventeen years.

WMT has delivered five and ten year earnings growth per share of 17% and 15%, respectively, and further expects to generate earnings of $2.40 per share for 2004, which would constitute an earnings yield of approximately 4.1% based upon the 12/31/04 closing price. At this level the earnings yield is inferior to the 10-year treasury and the yield on AAA corporate bonds. When factored in combination with the anticipated earnings growth rate in the near future of 15%, an investment in WMT suggests a better alternative than either fixed-income investment.

WMT has an unusually high ROE of 22.5% and an approximate P/E of 22.1 for 2004 and has delivered returns on equity roughly averaging 20% for the last ten years. Certainly the current year ROE surpasses the stated objective of 15%, which is incidentally also above average in terms of US corporations for the last 30 years.


WMT continues to show annually increasing cash flow per share, as well as average annual increases in net profit margins of 3.2%, with projections of 3.6% for 2004, while industry profit margins are approximately 2%. Additionally, the company has been repurchasing shares in recent years, which can prove beneficial to shareholders.

WMT has total debt of $31,588 millions and earnings of $10,200 millions, which would allow them to pay off the debt in less than five years. While the over all debt level is significant, WMT's on-going profitable operations indicate that the current debt levels are manageable.

Valuations considered:

Graham's heuristic:
Value = Current (normal) earnings x (8.5 + twice the expected annual growth rate)
The growth figure should be that expected over the next seven to ten years.

Value = $2.40 x (8.5 + (2 x 15.0))
Value = $92.40

Expected Future Stock Price Based on Avg. EPS Growth:

Estimated EPS growth has been listed as 15% by Value Line. Based upon this estimate and the 2004 projection of $2.40 earnings per share, one could estimate EPS in ten years of approximately $8.44. Taking the lower of current year P/E v. five-year average P/E and multiplying by the estimated EPS:
Value = $8.44 EPS x 22.1 P/E
Value = $186.52 (without dividends)
Estimated dividend growth has been listed as 16.2% by Value Line. Based upon this estimate and the 2004 projection of $0.48 dividends per share, one could estimate dividend funds over ten years of approximately $10.34 per share. The combined, projected dollar amount would then be roughly $196 per share, which would represent approximately a 14% average annual return on WMT's stock at the 12/31/04 closing price of $52.82.

While a projected compounded average growth rate of 14% is certainly worth considering; WMT has many other positive factors to consider. Given WMT's long history of increasingly expanding sales, earnings, and dividends combined with the domestic and ever-increasing international market-share, the company could serve as a solid, consistent performer both in terms of operating results and market price.

WMT Highlights: (Lesson in consistency)
- Avg. Net Sales growth of 15% over last 10 years
- Avg. Net Income growth of 14% over last 10 years
- Avg. Dividend growth of 17% over last 10 years
- Avg. ROE of 21% over last 10 years
- Avg. Cumulative Store increases of 7% over last 10 years
- Dominant retailer with 8% of market share, goal of 15%
- Same store sales is not the WMT internal metric, market share is the metric
o Example � prefer to have two stores at $100M sales or three stores at $80M sales? WMT prefers the latter, which supports their market share strategy, but negatively impacts same-stores sales.
o WMT projects they can add 4,000 Superstores over next 10-15 years, which would directly affect same-store sales, since some portion of that 4,000 would come from closing or upgrading discount stores.
- Assumptions through 2008:
o Continues to grow Net Sales at 11%, below the past ten year avg. rate of 15%
o Continues to grow Net Income (earnings) at 14%, in line with past ten year avg. of 14%
o Continues to grow Dividends at 16.5%, in line with past ten year avg. of 17%
- Conclusion:
o At P/E of 22.9 & 2/16/04 closing price of $52.60, could expect CAGR of 17-18%

Of course there are other considerations that one can make regarding any investment, including WMT. Obviously, these computations and assumptions should be updated to reflect management's comments from the annual report and in respect to current market/interest rates environments. Regardless, this type of review is where I begin with my investment analysis; from here further objective and subjective evaluation is considered ultimately leading to a go/no-go decision.

Regards,
Mistermarket


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