walmart investment analysis & recommendation paper

Running Head: FINANCIAL MANAGMENT 1

Investment Analysis and Recommendation Paper

[Name of the Writer]

[Name of the Institution]

FINANCIAL MANAGEMENT

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Investment Analysis and Recommendation Paper

Introduction

Sam Walton renowned businessman launched Walmart on July 2, 1962, in Rogers

which opened the doors for people to save money and live better! Sam Walton initiated

Walmart with one store in Rogers and today Walmart is operating more than ten thousand

retail units under sixty nine different banners in twenty seven countries. Almost two million

hard working associates are serving for two hundred million customers.

Walmart has great growth pattern and it is making a difference in its approaches

comparatively to its competitors. In the fiscal year 2012 Walmart delivered strong financial

performance and increased its net sales by 5.9% to $443.9 billion, (Annual Report, 2012).

The operating income of Walmart is increased by 4% to $26.6 billion. The earning per share

of Walmart is increased from $4.18 to $4.54 from preceding year (Annual Report, 2012,

http://www.walmartstores.com/sites/annual-report/2012/WalMart_AR.pdf). Walmart added

52.2 million square feet by 1160 supplementary units which includes various acquisitions in

South Africa and United Kingdom. Walmart delivered $11.3 billion exceptional returns to the

shareholders by giving them stock dividends. Walmart is conducting its business operations

strategically and making exceptional business progress.

Walmart U.S. believes in hard work and it is investing in lower prices and making

real improvements in merchandising and operations. Positive sales increments are giving high

returns on investments and equities. Walmart has never focused price leadership as Walmart

believes in serving rather than making huge amount of profits by charging high prices of the

FINANCIAL MANAGMENT 3

goods and services. Walmart believes in cost effectiveness and it initiated to invest $2 billion

in prices by expenses reductions and making productivity enhancements during the next

coming up years.

Walmart international is achieving exceptional sales targets and achieved $125 billion

sales. Walmart is among top three world largest retailers. Walmart is focusing to increase the

profitability in China and Brazil especially because Walmart is not achieving high

profitability from over these countries. Walmart has initiated “Powered by Walmart” as

initiative to strengthen the productivity and diminishing the extra expenses. There is no

suspicion that Walmart has proved itself as best positioned global trading retail stores.

Discussion

Wal-Mart Stores, Inc. (Walmart) is operating various retails stores in different formats

around the world. The company’s philosophy of pricing is “Every day low pricing –EDLP”.

The company is running in three different business segments, Walmart International, The

Sam’s Club and Walmart U.S. during the fiscal year 2012, Walmart U.S. segment accounted

for 60% of its net sales in operating retail stores in 50 states of the United States. Walmart

international is mainly generating income from 26 countries. Sam’s club segment is

consisting of warehouse membership clubs operating in 47 states in the United States and

Puerto Rico. Online retailing operations have also contributed for approximately 12% of its

net sales.

Walmart is operating retail stores in different formats worldwide, it operates apparel

stores, warehouse clubs, retail stores, restaurants, supermarkets, discount stores, supercenters

and neighborhood markets. Walmart significant five strategies are making it a global leader

these are developing people, driving the productivity loop reinvigorating customer-focused

culture, leading on social sciences and winning in Global e-commerce.


Walmart main points of focus are growth, profitability and leverage (Annual Report,

2012);

1. Profitability/Returns: Walmart is further looking for potential investors so that

it may expand further and invest into new business segments and strategic

business units.

2. Leverage: For attaining leverage Walmart initiated Powered by Walmart

approach which aims at reducing the cost of expenses and enhancing the

profitability of the company.

3. Growth: Walmart is looking to invest and expand its chain of stores into

metropolitan areas domestically and purchasing the international brands

internationally so that it may grow deep down the market and gain exceptional

profits.

Industry Analysis and Macroeconomics

The primary competitors of Wal-Mart in North America are department stores for

instances ALCO stores Inc., Big Lots, Costco Wholesale Corporation, Family Dollar stores,

inc., Dollar General Corporation, The Bon-Ton Stores, Inc., Tuesday morning corp., and

Meijer, Canada's Zellers, The Real Canadian Superstore Kmart, Target, ShopKo. Walmart

Sam's Club competitors include smaller BJ's Wholesale Club chain and Costco (Forbes).

In the segment of grocery business, Walmart has to compete with numerous retailers

for instances; Dollar General Corporation and Family Dollar stores. As Wal-Mart shifted into

the business of grocery in the late 1990s here also it set chief supermarket chains in both the

United States and Canada (Forbes).

The profitability of Walmart is increased from $30000 in 1962 to $15.8 billion in

2012. Walmart returned $101 billion to shareholders by giving dividends and share

repurchases. The sales revenue from $250,000 in 1962 increased to $443.9 billion in 2012.


Operating expenses are leveraged in the fiscal year 2012 and 2011. The operating expenses of

Walmart increased from 4.8% comparatively to 2011. Operating expenses of Walmart are

growing but at slower rate which is a positive sign for the company and moreover company is

focusing to reduce these expenses. Return on Investments – ROI is one of the most

significant metric to share it with the investors so that investor may have a clear idea about

how effectively Walmart is managing and utilizing its current and non current Assets. The

return on Investment grew to 19.2% from 18.6% in the fiscal year 2012. Global e-commerce

and inventories have increased the operating cost but the price of investments will be covered

by full realization and achieving maximum profitability. Return on investment of Walmart

although increased but this incremental have been off set due to acquisitions. Return on

Investment is considered as non-GAAP financial measure which is 18.6% (Annual Report,

2012) and 19.2% in the year of 2011. Return on assets is 8.8% which was 9.1% in the year of

2011

The trend analysis of the company reveals that profitability of the company is

increasing consistently from 2006 to 2013 and the trend indicate that it will further increase

ahead till the year of 2015 if the economic factors remain the same.


Capital Market Analysis Market COST Wal-Mart TGT Industry

P/E Ratio (TTM) 17 23.04 13.23 15.63 20.09

Dividend Yield 1.68 1.4 2 1.3 1.47

Payout Ratio 36.03 26.4 29.03 20.0 18.19

Price to Sales Ratio 3.54 .38 .49 .64 .52

Price to Earnings Ratio 25.97 23.04 13.25 15.63 15.08

Price to Cash Flow Ratio 22.03 10.79 7.74 7.52 8.31

The dividend yielding of the share of Walmart is 2 which a positive sign from the investment

perspective and in future company expect that its share yield will increase. The price to cash

flow ratio is 7.74 which is almost equivalent to the industry average it indicates that Walmart

has enough liquidity to maintain and clear out its financial obligations and the sequential flow

of cash is consistent.


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Financial Analysis

The growth and financial ratios of the Walmart store indicates that company is having sound financial positions. The gross profit margin

percentage is increasing from 23.2 – 2004 to 24.9 – 2013. The operating income of the company is increasing from $15025 (2004) to $26558

(2012). The operating margin percentage is maintained from which 5.9 and it is one of the biggest aspects that in spite of variable economic

factors company is maintaining the operating margin. The net income of the company is also increasing from $9054 (2004) to $15699 (2012).


The book value of per share of Walmart is also increasing from $10.08 (2004) to $21.44 (2012). The working capital which is the

difference of current Assets and current liabilities indicated that Walmart is having working capital deficiency and it current assets are not

enough to meet the current obligations. The financials of the company from the fiscal year 2004 to 2013 indicated that company is maintaining

good financial position however short term issues are still there but majorly company is has strong financial position in comparatively to

industrial average.


The financial leverage of the company is 2.41 (2004) to 2.71 (2012) which indicates that the riskiness of company is maintained and the

company is utilizing the borrowed funds (either from financial institutions or from banks) and maintaining good financial structure. The debt and

Equity financing of the company is balanced and company is looking to go for equity financing more rather than debt financing.


The operating cash flow is increasing. Years over years are frequently used by investors to assess the financial health of the organization and

from 2004 to 2013 Walmart is progressing by exceptional volume. The free cash flows to sales percentage ratio is 2.71 in the year of 2013 which

indicates that company is making progress and the cash flow is generating by every single unit sale which adding more financial value to the

company.


Liquidity Position of Walmart

The liquidity position of Walmart indicates that company has not enough cash to meet its current obligations and current liabilities are

more than current assets, The current ratio trend of the company is indicating that the liquidity position of the company is getting weaker which

may become severe in future. The quick ratio of the company is indicating that the quick assets of the company are not enough to meet the

current obligations of the company. Therefore Walmart essentially focus on the capacity building and consider the liquidity position by adding

more current assets. Walmart is fundamentally a retail store which must have to deal in inventory therefore it is recommended that Walmart must

have enough inventories to maintain its liquidity position plus stock levels. The debt to equity ratio of the company is stable and it is in

increasing trend which means that Walmart is having enough equity to meet its overall liabilities and it is the positive sign for the company as

this is indicating that Walmart is not merely based on debt financing but also equity based financing as well. The total worth of the company is

more than the obligations which proves its sustainability and credibility.

The days sales outstanding is 5 at maximum which means that company’s inventory is not staying on the shelf and within the period of

five days the sale of the inventory take place. It indicates that customers are highly satisfied with the Walmart products and they are interested in

acquiring the company’s product more comparatively to the other competitors. The cash conversion cycle of the company is working efficiently

and effectively as the time period is decreasing and from the year 2004 to 2013 it has brought down from 18 to 10.The inventory is not staying

for along period of time and the sales take place within few days to give the room for acquiring cash and cash equivalents.


The receivable turnover indicates that after making credit sales company recovers its employed funds within 153.89 initially at 2004 but

by 2013, the company’s receivable turnover has been reduced to 79.96. It is one of the remarkable achievement as far as the liquidity of the

company is concerned it indicates that company is looking forward to maintain its liquidity positions. The inventory turnover of the company is

7.72 from 2004 and by 2013 it has become 8.37. The inventory turnover of the company is acceptable and it indicates that the inventory cycle of

the company is very specious. The Fixed asset turnover of the company is indicating that the Walmart is that company is generating good

amount of sales by employing its fixed assets with efficacy and effectively.

Stock Valuation

For assessing the investment opportunities in Walmart share it is essential to find out the Walmart share’s Intrinsic Value. The common

measure for assessing the shares worth fullness it is advisable to understand the level of price to earning ratio in comparison with competitors.

For comparison Walmart two competitors TARGET and COSTCO price to earning ratio is calculated and shown in the graph indicating that

Walmart is lagging behind from both of its competitors and the industry as whole. This is the indication that Walmart is valuation is lower in

comparison with competitors. The analysis is subjective on the basis of how a investor would react after viewing its price to earning ratio.

For finding the real worth of the share it is essential to find out the intrinsic value of the share. The intrinsic value is being calculated by using

Dividend Discount model. Multi stage model is being used for evaluating the Walmart stock.


The financial analysis of the company is indicating that, at the time of aggressive growth the dividend growth rate is 13.29% and growing

by the rate of 5.84% per year. After financial analysis of the company it is considered that trend will remain continues till the next five years the

discount rate beta is set 0.26.

Wal-Mart Stores Inc., expected rate of return

Assumptions Rate of return on LT Treasury Composite 3.24%Expected rate of return on market portfolio 13.29%Systematic risk (β) of 's common stock 0.26 Expected rate of return on 's common stock 5.84%

Wal-Mart Stores Inc., systematic risk (β) estimation

Variance(WMT) 21.81Variance(NYC) 32.60Covariance(WMT, NYC) 8.44Correlation Coefficient(WMT, NYC) 0.32β(WMT) 0.26α(WMT) 0.78

After deciding on what growth rate discount rate must be settled. Capital Asset pricing model was used for finding out the discount rate

and it is taken 0.26 as Walmart low beta does not address fully to the market risk that is faced by the investor. However, discount rate is still

much lower than average but it at least better indicate the reality to a certain extent.


Wal-Mart Stores Inc., required rate of return

Assumptions Rate of return on LT Treasury Composite 3.24%Expected rate of return on market portfolio 13.29%Systematic risk (β) of 's common stock 0.26 Required rate of return on 's common stock 5.84%

Intrinsic Stock Value (Valuation Summery)

Wal-Mart Stores Inc., dividends per share (DPS) forecast

USD $

Year Value DPSt or Terminal value (TVt) Calculation Present value at 5.84%

0 DPS01 1.59

1 DPS1 1.83 = 1.59 × (1 + 15.15%) 1.73

2 DPS2 2.06 = 1.83 × (1 + 12.26%) 1.83

3 DPS3 2.25 = 2.06 × (1 + 9.37%) 1.90

4 DPS4 2.39 = 2.25 × (1 + 6.49%) 1.91

5 DPS5 2.48 = 2.39 × (1 + 3.60%) 1.87

5 Terminal value (TV5) 114.66 = 2.48 × (1 + 3.60%) ÷ (5.84% – 3.60%) 86.33


Intrinsic value of 's common stock (per share) $95.56

Current share price $73.51

The Intrinsic value of the share is $95.56 however its market current value is $73.51.

Stock Chart of Ten Years


The stocks ten years chart indicates that company’s share value is in increasing trend however there were declination in the period of

2006 to 2008 but later on the stock value increases and after computing the intrinsic value of the share it is considered that the share value will

remain consistent and it will grow further. Investor must invest in the stocks of Walmart.


The dividend per share of Walmart is increasing and in future it will be raising as the company has done various acquisitions those

retailing stores will be contributing further.

The earning per share of the Walmart is in increasing trend and investors have better option to invest in expect little margin with low riskiness.


Capital Structure

Cost of Debt

For calculating the cost of debt, effective interest rates for long term debt and effective tax rate is used for finding out the weighted

average cost of debt. The Walmart annual report is having tax rates and interest rates therefore the cost of debt is calculated by the formula

KD=I (1-CT).

Cost of Equity

By using the dividend growth model it is estimated that growth rate of dividend is 19.08% ($0.67(1+g) 2=$0.95). The cost of equity

calculated by K0= D0 (1+g)/P0 +g, D0 is the current dividend quoted at the annual report of Walmart.


Conclusion

Wal-Mart Stores, Inc. (Walmart) is operating various retails stores in different formats around the world. The company’s philosophy of

pricing is “Every day low pricing –EDLP”. The company is running in three different business segments, Walmart International, The Sam’s

Club and Walmart U.S. during the fiscal year 2012, Walmart U.S. segment accounted for 60% of its net sales in operating retail stores in 50

states of the United States. Walmart international is mainly generating income from 26 countries. Sam’s club segment is consisting of warehouse

membership clubs operating in 47 states in the United States and Puerto Rico. Online retailing operations have also contributed for

approximately 12% of its net sales.

Walmart is having an excellent financial structure and the cost of debt is 7.27% and the cost of equity is 9.07%. The stock intrinsic value

is $95.56 and its current market value is $73.51. Investor must invest into the company as the trends are demonstrating that the Walmart will be

making exceptional progress ahead.


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References

Forbes Financial (2010), Forbes.com LLC 2010 Web. 17 Oct, retrieved from

http://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?

tkr=wmt&tab=searchtabquotesdark

Investopedia, Investopedia ULC 2010, Web Source

http://www.investopedia.com/terms/w/wide-economic-moat.asp

Morningstar, Morning, Inc. 2012 Web, 11 Oct. 2012

http://financials.morningstar.com/income-statement/is.html?

t=WMT&region=USA&culture=en-US

MSN, Thomson Reuters, 2010, retrieved from

http://moneycentral.msn.com/news/ticker/sigdev.aspx?Symbol=WMT

Reuters, Thomson Reuters, 2010, retrieved from

http://www.reuters.com/sectors/industries/rankings?view=size&industryCode=101

The Wall Street Journal, Dow Jones & Company, Inc 2010, data available at

http://online.wsj.com/public/quotes/main.html?symbol=WMT&type=usstock

%20usfund&mod=DNH_S

Wal-Mart Annual Report, 2012, Walmart Web source.

(http://cdn.walmartstores.com/sites/AnnualReport/2010/PDF/WMT_2010AR_FINAL

.pdf)

Wal-Mart Corporate, 2012, Wal-Mart Incorporation; retrieved from

(http://walmartstores.com/AboutUs/)


Yahoo! Finance, Yahoo! News Network 2010 Web, http://finance.yahoo.com/q/pr?

s=WMT+Profile

Hoover’s, Hoover’s Inc, 2012, Available at http://premium.hoovers.com/subscribe/


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Appendix

Wal-Mart Stores Inc., monthly rates of return

Wal-Mart Stores Inc. (WMT)NYSE Composite Index

(NYC)

t Date Price(WMT, t)Dividend(WMT,

t)R(WMT, t) Price(NYC, t) R(NYC, t)

Feb 28, 2007 48.31 9,124.54 1. Mar 31, 2007 46.95 0.22 -2.36% 9,261.82 1.50%2. Apr 30, 2007 47.92 2.07% 9,627.73 3.95%3. May 31, 2007 47.60 0.22 -0.21% 9,978.64 3.64%4. Jun 30, 2007 48.11 1.07% 9,873.02 -1.06%5. Jul 31, 2007 45.95 -4.49% 9,554.50 -3.23%6. Aug 31, 2007 43.63 0.22 -4.57% 9,596.98 0.44%7. Sep 30, 2007 43.65 0.05% 10,039.30 4.61%8. Oct 31, 2007 45.21 3.57% 10,311.60 2.71%9. Nov 30, 2007 47.90 5.95% 9,856.85 -4.41%10. Dec 31, 2007 47.53 0.22 -0.31% 9,740.32 -1.18%11. Jan 31, 2008 50.74 6.75% 9,126.16 -6.31%12. Feb 29, 2008 49.59 -2.27% 8,962.46 -1.79%13. Mar 31, 2008 52.68 0.24 6.71% 8,797.29 -1.84%14. Apr 30, 2008 57.98 10.06% 9,299.60 5.71%15. May 31, 2008 57.74 0.24 0.00% 9,401.08 1.09%16. Jun 30, 2008 56.20 -2.67% 8,660.48 -7.88%17. Jul 31, 2008 58.62 4.31% 8,438.64 -2.56%18. Aug 31, 2008 59.07 0.24 1.17% 8,382.08 -0.67%19. Sep 30, 2008 59.89 1.39% 7,532.80 -10.13%20. Oct 31, 2008 55.81 -6.81% 6,061.09 -19.54%21. Nov 30, 2008 55.88 0.13% 5,599.30 -7.62%


22. Dec 31, 2008 56.06 0.24 0.75% 5,757.05 2.82%23. Jan 31, 2009 47.12 -15.95% 5,195.79 -9.75%24. Feb 28, 2009 49.24 4.50% 4,617.03 -11.14%25. Mar 31, 2009 52.10 0.27 6.36% 4,978.98 7.84%26. Apr 30, 2009 50.40 -3.26% 5,513.36 10.73%27. May 31, 2009 49.74 0.27 -0.77% 6,004.07 8.90%28. Jun 30, 2009 48.44 -2.61% 5,905.15 -1.65%29. Jul 31, 2009 49.88 2.97% 6,424.28 8.79%30. Aug 31, 2009 50.87 0.27 2.53% 6,643.24 3.41%31. Sep 30, 2009 49.09 -3.50% 6,910.88 4.03%32. Oct 31, 2009 49.68 1.20% 6,739.45 -2.48%33. Nov 30, 2009 54.55 9.80% 7,092.36 5.24%34. Dec 31, 2009 53.45 0.27 -1.52% 7,184.96 1.31%35. Jan 31, 2010 53.43 -0.04% 6,883.78 -4.19%36. Feb 28, 2010 54.07 1.20% 7,035.04 2.20%37. Mar 31, 2010 55.60 0.30 3.39% 7,447.80 5.87%38. Apr 30, 2010 53.64 -3.53% 7,474.40 0.36%39. May 31, 2010 50.56 0.30 -5.18% 6,791.57 -9.14%40. Jun 30, 2010 48.07 -4.92% 6,469.65 -4.74%41. Jul 31, 2010 51.19 6.49% 6,998.99 8.18%42. Aug 31, 2010 50.14 0.30 -1.46% 6,704.15 -4.21%43. Sep 30, 2010 53.52 6.74% 7,281.07 8.61%44. Oct 31, 2010 54.17 1.21% 7,513.35 3.19%45. Nov 30, 2010 54.09 -0.15% 7,430.94 -1.10%46. Dec 31, 2010 53.93 0.30 0.26% 7,964.02 7.17%47. Jan 31, 2011 56.07 3.97% 8,139.16 2.20%48. Feb 28, 2011 51.98 -7.29% 8,438.55 3.68%49. Mar 31, 2011 52.05 0.37 0.84% 8,404.98 -0.40%50. Apr 30, 2011 54.98 5.63% 8,671.41 3.17%51. May 31, 2011 55.22 0.37 1.10% 8,477.28 -2.24%52. Jun 30, 2011 53.14 -3.77% 8,319.10 -1.87%


53. Jul 31, 2011 52.71 -0.81% 8,079.44 -2.88%54. Aug 31, 2011 53.19 0.37 1.60% 7,528.39 -6.82%55. Sep 30, 2011 51.90 -2.43% 6,791.65 -9.79%56. Oct 31, 2011 56.72 9.29% 7,563.38 11.36%57. Nov 30, 2011 58.90 3.84% 7,484.50 -1.04%58. Dec 31, 2011 59.76 0.37 2.08% 7,477.03 -0.10%59. Jan 31, 2012 61.36 2.68% 7,838.48 4.83%60. Feb 29, 2012 59.08 -3.72% 8,113.24 3.51%61. Mar 31, 2012 61.20 0.40 4.26% 8,206.93 1.15%62. Apr 30, 2012 58.91 -3.74% 8,119.06 -1.07%63. May 31, 2012 65.82 0.40 12.40% 7,463.96 -8.07%64. Jun 30, 2012 69.72 5.93% 7,801.84 4.53%65. Jul 31, 2012 74.43 6.76% 7,863.93 0.80%66. Aug 31, 2012 72.60 0.40 -1.92% 8,014.93 1.92%67. Sep 30, 2012 73.80 1.65% 8,251.00 2.95%68. Oct 31, 2012 75.02 1.65% 8,221.40 -0.36%69. Nov 30, 2012 72.02 -4.00% 8,260.43 0.47%70. Dec 31, 2012 68.23 0.40 -4.71% 8,443.51 2.22%71. Jan 31, 2013 69.95 2.52% 8,894.71 5.34%Average: 0.82% 0.13%Standard Deviation: 4.67% 5.71%

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