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Model Vs. Market

Model Vs. Market – Wal-Mart Stores

By August 25, 2015No Comments

In today’s Model Vs. Market post we’re looking at Wal-Mart Stores. Wal-Mart has transitioned into a low-growth company that is now increasingly competing with online retailers such as Amazon and warehouse clubs such as Costco. As a result, the stock is trading near its 52-week low.

Company Profile

Wal-Mart Stores, Inc. is engaged in the operation of retail, wholesale and other store units in various formats around the world. Its range of products span apparel, footwear, accessories, home decor, kitcehn, garden, furnishing, books and devices, among others. Its business is divided into three reportable segments: Walmart US (the largest segment which operates retail stores in all 50 states), Walmart International (operations in 26 countries outside the US in formats like supercenters, supermarkets, hypermarkets and warehouse clubs) and Sam’s Club (membership-only warehouse clubs and digital retail stores). The firm’s household name brands include Great Value, Equate, Sam’s Choice, Ol’Roy, Mainstays, Parent’s Choice and Play Day, among others.

The firm’s market presence spans the US, Central America, Canada, Africa, Argentina, Brazil, Chile, China, India, Japan, Mexico and the UK. The company was incorporated in 1969 and its headquarters are located in Bentonville, Arkansas.

What are shares of Wal-Mart worth?

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Our DCF valuation model is indicating that shares of Wal-Mart Stores are worth $80 which is 25% above its current market value. Here are the key assumptions used to arrive at this value:

  • Revenue Growth – Over the last 5 years revenue has grown at an average rate of 3.6%. The model assumes the same growth rate for the next 4 years followed by a terminal growth rate of 2.5%.
  • Profitability – Over the last 5 years the EBITDA margin has averaged 7.7%. The model assumes this same margin going forward.
  • Depreciation – Depreciation in 2014 was 1.9% of revenue. The model assumes this same rate of depreciation going forward.
  • Income Taxes – The average effective tax rate for the last 5 years was 32.2%. The model assumes this same effective tax rate going forward.
  • Capital Investment – Over the last 5 years the company has spent 2.8% of its revenue on capital investments, net of dispositions. The model assumes the same level of investment going forward.
  • Working Capital – After netting out cash, short-term investments and short-term debt the company operates with negative working capital. The model assumes this will continue at the same rate as revenue grows.
  • Discount Rate – The assumed cost of equity is 10% and the assumed cost of debt is 3.5% over the 10-year U.S. treasury rate. The company’s weighted average cost of capital is estimated at 8.94% in the model. Reducing the cost of equity to 8% increases the valuation to $113 per share.

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This model was created by extrapolating the last 5 years of performance into the next 5 years of performance. Before making an investment decision you should run your own model with your own assumptions based on your own research of the company. Download this model to perform your own valuation and let us know what you think shares of the company are worth on Twitter @tagnifi.

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