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WAL-MART ANALYSIS Stock Price Evaluation

WAL-MART ANALYSIS Stock Price Evaluation. Professor Doug Towsey Fin 330 May 29, 2003  Team Members: Cam T. Ashling Jenae M. Brooks Fadi A. Manneh Sapna R. Shah Xin R. Wang . Wal-Mart at a Glance. The world’s largest retailer: 100 million customers per week worldwide

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WAL-MART ANALYSIS Stock Price Evaluation

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  1. WAL-MART ANALYSISStock Price Evaluation Professor Doug Towsey Fin 330 May 29, 2003  Team Members: Cam T. Ashling Jenae M. Brooks Fadi A. Manneh Sapna R. Shah Xin R. Wang

  2. Wal-Mart at a Glance The world’s largest retailer: • 100 million customers per week worldwide • 1.3 million employees • 3,200 locations in the United States • 1,100 locations in Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea, Germany, and the United Kingdom • $218 billion in sales 2002

  3. Industry Outlook • Household products, retail drugs stores, and personal care segments are expected to produce above-average revenue growth and earnings in the coming months • Operating earnings are expected to rise 4% to 5% in 2003 • The retail industry is expected to perform in line with the overall market in the next 6-12 months

  4. Porter’s Five Forces

  5. Power of Suppliers • Wal-Mart is the largest customer to companies like Kraft Foods, Gilette, and P&G • It has buyer advantages, such as favorable payment terms, discounts, and priority delivery dates Power of Buyers • Wal-Mart is not monopolistic • Buyers have bargaining power

  6. Barriers to Entry • High cost of constructing a large discount facility • Barriers to entry do exist • But it is possible to raise the capital for such a project

  7. Availabilities of Substitutes • Wal-Mart’s major competitors include Target, K-mart, Costco, Dollar General and other discounters • Substitutes are available but Wal-Mart tends to build in locations where they eat up small competitors • Leaving little room for other large competitors

  8. Price/Earnings Industry Average 25.82 2003 Jan 2, 2003 $51.60 / 1.81 = 28.51 2002 Jan 2, 2002 $58.05 / 1.49 = 38.96 2001 Jan 2, 2001 $53.88 / 1.41 = 38.21

  9. Price to Book Value Industry Average 5.15 2003 Jan 2, 2003 $51.60 / $8.89 = 5.8 2002 Jan 2, 2002 $58.05 / $7.86 = 7.38 2001 Jan 2, 2001 $53.88 / $7.02 = 7.67

  10. Profitability Ratios • After-Tax margin: • Five-year average for Wal-Mart is 3.22% • Industry average is 3.48% • Primary reason is because of low prices. So, the profitability strategy is to generate mass turnover to compensate for lower profit margins • Return on Equity : • The five years average on ROE for Wal-Mart is 22.23% • Industry norm has been 20.68% • This shows that it has been positive and is reflected by a higher income per share issued

  11. Asset-Utilization Ratios • Receivable Turnover: • The recent asset turnover 115.99 x • Industry average is 10.97 x • Portrays efficiency and strength of Wal-Mart • Inventory Turnover: • Recent inventory turnover is 9.82 x • Industry average 6.21 x • Wal-Mart has shown superior strength in their ability to “clear their shelves” faster than most other competitors in their industry • Total Assets Turnover • Most recent is 2.58 x • Industry average is 2.4 • Shows strong ability to have return on sales in relation to assets

  12. Liquidity/ Debt-Utilization Ratios • Current Ratio • Wal-Mart 5-year average is .94 • Industry average is 1.20 • Greater chance to go into liquidation • Quick Ratio • Five-year average is .19 • Industry average that is .36 • Caused by high investment in inventory • Long-term debt to equity • Most recent is .4222 • Industry average is .63 • Better in terms of risk involved and more flexibility

  13. Valuation Models • Constant Growth Model • Non-Constant Growth Model • Income Statement Method • Combined Earnings & Dividend Model • Price Averaging Ratios

  14. CAPM • CAPM is used to derive the cost of equity, which is need to develop the valuation models Ke = Rf +ß(Km-Rf) = 3.43% + .89 (8.3%) = 10.817%

  15. Constant Growth Model • Po = D1/(Ke-g) • Po = .32 /(10.817% -12%) • This model cannot be used because the cost of equity is less than the expected growth rate as given by Value-Line.

  16. Non-Constant Growth Model

  17. Income Statement Method

  18. Combined Earnings & Dividend Model

  19. Price Average Ratios

  20. Price Average Ratios Cont.

  21. Recommendation Buy Wal-Mart (WMT) now • Reasons: • Price Ratios trade at 28 x higher than industry • High reinvestment opportunities can be seen through low dividend yield • Seems to have a robust management system • A strong use and standing in Porter’s Five Forces • All valuation models that did not include dividends show that it is undervalue

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