Walmart: Buy, Hold or Sell?

Until recently, Walmart's dominance on the supermarket retail space was practically unchallenged. With the advent of the financial crisis, bargain shops have begun to encroach on WMT's territory, and online retailers like Amazon also has similar ambitions. However, WMT still is a gorilla in retail, and its business model of providing cheap groceries and other household items, with "Low Prices. Everyday. On Everything"  essentially sums up why its market share would be hard to erode. WMT is still cheap due to the headwinds from a recovering US economy but the defensive nature of the company and its leadership in retail  positions it well when the economy stabilises, best seen when unemployment sustains its downward trend.

But as with all investment analyses, the question is, what is the right price?   As usual, click read more, to, read more!

On a seperate note, I have discontinued placing the spreadsheets of my calculations online. I typically only keep 1 version of these sheets and update them or use them in scenario testing. Hence the data might have changed since the original time of analysis. If you do wish to obtain my calculations, please email me and we can also discuss the analysis offline.

Disclosure: I have direct holdings in WMT, but not in AMZN.

Walmart (NYSE: WMT)

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28Nov10

P=53.74

WMT’s FY11 ends 31Jan11.

EPS_11f=4.08-4.12 [source: WMT 3q guidiance]

PER_11f=13.17x

There is seasonality in earnings, with 4Q being the strongest, followed by 2q. 1q and 3q register about the same earnings.

ROI_ttm=18.6%

They have a new 15b share repurchase program approved Jun 10 (replacing prev authourisation), and has 8.5b left.

International operations are an important growth area, though US revenues still dominate (76.5%). Int ops grew 13.5% ytd while US ops were practically flat.

Its current assets are less than its current liability (current ratio=0.87)

BV=68.02b

Diluted num of shares outstanding=3.631b

BVPS=18.73

PB=2.87x

FCF_ytd=2.946b

FCF_ytd/share=0.811

P/FCF=66.2x.

FCF yield=1.5%

[I am abit confused over the FCF ratios. I am  not sure if I just didn't understand the data correctly since its historical FCF is far higher]

The PB, FCF yield, current ratios are not healthy.

Div=0.303*4=1.212

Divyield=2.25%

In fact, the FCF doesn't even cover the dividend.

WMT makes quite a fair use of debt, it’s debt to cap ratio=46.4%.

A simple FV estimate at g=3% and beta=0.32 [source:googlefin], r_e=3+.32*5=4.6. FV=1.2*1.03/(0.046-0.03)=77.25

YTD PER_11f range=11.7-13.79

The average PER is 15.12 over 6 years, with valuations especially low in 2010 and 2011. A 20% discount is 15.15*4.08/1.2=51.51.

Conclusion: TP=61.81 with buy price at 51.51 for 20% margin.

18Feb11

P=54.75

Using FCF analysis, WMT’s FV=75.97 based on 2010 AR data. This is a 39% upside. WMT’s beta is extremely low (0.32) which accounts for its cheap cost of equity. At this P, PER=18.62x, which is by no means cheap but WMT never even approached such cheap valuations before 2005, trading above 20x. Using linear projections for 2011, FV=81.22 or 19.9x PER. WMT’s earnings has been on the increase in the last 10 years, without even a single year of decrease. Even if I hike RFR to 30year USG rates at 4.75%, I still get almost a 20% margin with FV=65.09.

Conclusion: WMT’s business model is outstanding, and I want to initiate a buy with TP=75.97.

21Feb11: I am revising FCF analysis to use 30yr USG bond for conservativeness. Revise FV=65.09.

22Feb11

P=53.49

EPS_11=4.18 [this is for continuing operations. it is 4.47 incl discountinued ops where it received a tax benefit]

PER_11=12.8x.

While the EPS is better, US comparables fell 1.8% [it has fallen for 7 consecutive quarters] and WMT is losing about 4% from the previous close.

EPS_12f=4.35-4.5 [source: 4q guidance]

PER_12f=11.9-12.3x

Updating the FCF analysis, 2011 data gives FV=53.93 or an upside of 1%, very much lower than 2010 data. FCF has fallen by almost 4b, and capex has risen 1b. What the data does tell me is that WMT is now priced for zero growth. Even a 1% growth boosts the numbers tremendously, with FV=70.23 or an upside of 31%.

Div_11=1.21

Divyield_11=2.26%

Div yield has increased a fair bit from earlier years on lower retention ratios and earnings growth.

Average PER=15.27 [using data from 2006 till now]. Using EPS_11, TP=63.83 or 19% upside. Using EPS_12f, TP=66.42 or 24% upside.

On an absolute valuation basis, WMT is fairly valued for zero growth. On a relative basis, WMT is cheap, with upside exceeding 20%. On the balance of things, I find that WMT merits a buy, given that I have now used very conservative numbers for FCF (30yr instead of 10yr bond, zero LTEG). However, it should be noted that WMT has also a very low beta, which then gives a very strong multiplier to its FCF. This beta does have an economic basis given its sales of consumer staples. Forward looking, WMT does look good even though I should avoid forward looking aspects. On a historical basis, WMT is priced for zero growth. Which has no basis since WMT’s EPS growth is typically above 7%. On a global basis, WMT has much growth opportunity. However, it’s decreasing comparables in US which accounts for 60% of its revenues is worrying. This also is set to reverse when the economy improves though discount stores have come up which has taken market share. But given WMT’s biz model, it should still have a strong advantage in pricing its goods which should stabilise if not retake market share. And the decreases are not significant.

I would continue buying WMT with TP=63.83.

My average purchase P=53.898.

4Mar11: WMT announced div_12=1.46, a 21% increase from div_11. Which is healthy and in line with its consistent performance.