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Module 3 – Multiples Junichi Hara

Module 3 – Multiples Junichi Hara. Agenda. Comparability check Enterprise value m ultiples Equity multiples Industry m ultiples Summary and recommendation. 1. Comparability Check. Big Question. Are these firms even comparable?. Business Model. Walmart – Supercenters + Warehouse

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Module 3 – Multiples Junichi Hara

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  1. Module 3 – MultiplesJunichi Hara

  2. Agenda • Comparability check • Enterprise value multiples • Equity multiples • Industry multiples • Summary and recommendation

  3. 1. Comparability Check

  4. Big Question • Are these firms even comparable?

  5. Business Model • Walmart – Supercenters + Warehouse • Costco – Warehouse • Wholefoods – Premium/Differentiation • Kroger – Grocery + Convenience + Jewelry

  6. Geography • Walmart is a global company (27 countries)

  7. Geography • Costco also global • 183 out of 634 warehouses outside US • Whole Foods mostly US • 15 out of 362 stores in UK/Canada • Kroger all US

  8. Profitability • WFM most profitable • WMT beats COST and KR

  9. Leverage • Wide variation in leverage • Equity multiples jeopardized?

  10. Turnover • WMT surprisingly has low turnover • Due to WMT’s low CoGS?

  11. Growth • WFM fastest grower • WMT slowest grower

  12. Conclusions • Whole Foods Market (WFM) seems like outlier • Other comparables don’t look promising • Equity multiples invalid due to leverage?

  13. 2. Enterprise Value Multiples

  14. Walmart’s Current Price • WMT’s Current Share Price - $74.42

  15. Enterprise Value Multiples • Net Enterprise Asset (NEA) multiple • Enterprise Profit After Taxes (EPAT) multiple

  16. NEA Multiple (w/ WFM)

  17. NEA Multiple (w/o WFM)

  18. WFM Should Be Excluded • WFM inflating multiples • Rest of analysis will exclude WFM

  19. EPAT Multiple

  20. Summary • Actual price: $74.42 • Enterprise multiples give much higher price

  21. 3. Equity value multiples

  22. Equity Value Multiples • Book Value (BV) multiple • Net Income (NI) multiple • Comprehensive Income (CI) multiple

  23. Book Value Multiple

  24. Net Income Multiple

  25. Comprehensive Income Multiple

  26. Summary • Actual price: $74.42 • Equity multiples closer to current price • CI multiple higher • Currency translation? • Estimates still high

  27. 4. Industry Multiples

  28. Industry Multiples Considered Enterprise value over… • Turnover? • Sales per square footage? • Problem: Doesn’t capture scale

  29. Industry Multiples Chosen Enterprise value over… • Sales • Square footage

  30. Sales Multiples (No WFM)

  31. Sales Multiples (w/ WFM)

  32. Sales Multiple – Why? • Because WMT has higher margins? • Adding WFM compensates this?

  33. Square Foot Multiples (No WFM)

  34. Square Foot Multiples (w/ WFM)

  35. Square Foot Multiples – Why? • Now WFM over inflating multiples • WFM high sales per sq. ft.

  36. Summary • Actual price: $74.42 • Sales multiple gives extreme result

  37. 5. Summary and Recommendation

  38. Summary • Actual price: $74.42 • $41.30 difference w/ and w/o WFM • $23.64 difference between actualand estimatew/o WFM

  39. Summary • Actual price: $74.42 • Based on calculations: Buy • But… • Not very confident

  40. Big Question Unanswered • Are these firms even comparable?

  41. Concerns • Capital structures are different • Business models and margins different? • Better comparables? • E.g. Target

  42. Questions?

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