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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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Agenda • Comparability check • Enterprise value multiples • Equity multiples • Industry multiples • Summary and recommendation
Big Question • Are these firms even comparable?
Business Model • Walmart – Supercenters + Warehouse • Costco – Warehouse • Wholefoods – Premium/Differentiation • Kroger – Grocery + Convenience + Jewelry
Geography • Walmart is a global company (27 countries)
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
Profitability • WFM most profitable • WMT beats COST and KR
Leverage • Wide variation in leverage • Equity multiples jeopardized?
Turnover • WMT surprisingly has low turnover • Due to WMT’s low CoGS?
Growth • WFM fastest grower • WMT slowest grower
Conclusions • Whole Foods Market (WFM) seems like outlier • Other comparables don’t look promising • Equity multiples invalid due to leverage?
Walmart’s Current Price • WMT’s Current Share Price - $74.42
Enterprise Value Multiples • Net Enterprise Asset (NEA) multiple • Enterprise Profit After Taxes (EPAT) multiple
WFM Should Be Excluded • WFM inflating multiples • Rest of analysis will exclude WFM
Summary • Actual price: $74.42 • Enterprise multiples give much higher price
Equity Value Multiples • Book Value (BV) multiple • Net Income (NI) multiple • Comprehensive Income (CI) multiple
Summary • Actual price: $74.42 • Equity multiples closer to current price • CI multiple higher • Currency translation? • Estimates still high
Industry Multiples Considered Enterprise value over… • Turnover? • Sales per square footage? • Problem: Doesn’t capture scale
Industry Multiples Chosen Enterprise value over… • Sales • Square footage
Sales Multiple – Why? • Because WMT has higher margins? • Adding WFM compensates this?
Square Foot Multiples – Why? • Now WFM over inflating multiples • WFM high sales per sq. ft.
Summary • Actual price: $74.42 • Sales multiple gives extreme result
Summary • Actual price: $74.42 • $41.30 difference w/ and w/o WFM • $23.64 difference between actualand estimatew/o WFM
Summary • Actual price: $74.42 • Based on calculations: Buy • But… • Not very confident
Big Question Unanswered • Are these firms even comparable?
Concerns • Capital structures are different • Business models and margins different? • Better comparables? • E.g. Target