Valuing Wal-Mart Essay Example for Free

Valuing Wal-Mart EssayIn early February 2010, Sabrina Gupta, an investment advisor with a major brokerage firm, was examining Wal-Mart Stores, Inc. (Wal-Mart) shopworn and its valuation. Gupta wondered whether to suggest the stock to some(prenominal) of her new clients or to existing clients who did not currently have Wal-Mart in their portfolios.BACKGROUND OF WAL-MART STORES, INC.Based in Bentonville, Arkansas, and founded by the legendary surface-to-air missile Walton, Wal-Mart was the worlds largest retailer, operating more than 8,400 stores worldwide, including stores in all 50 states international stores in Argentina, Brazil, Canada, Germany, Mexico, Puerto Rico, South Korea, the United Kingdom joint venture agreements in China and a stake in a leading Japanese retail chain. Worldwide, Wal-Mart had 2.1 million employees (known as associates), who served more than 200 million customers each week. During the financial year ended January 31, 2010, Wal-Marts net sales were more than US$405 billion. Exhibit 1 presents a summary of Wal-Marts 2009and 2010 financial statements. Wal-Marts outline was to provide a broad assortment of quality merchandise and services at everyday low equipment casualtys.It was best known for its discount stores, which offered merchandise much(prenominal) as apparel, small appliances, housewares, electronics and hardware, but also ran combined discount and grocery stores (Wal-Mart Supercenters), membership-only store stores (SAMS Club) and smaller grocery stores (Neighborhood Markets). In the general merchandise area, Wal-Marts competitors included Sears and Target. In terms of specialty retailers, its competitors included Gap and Limited. Department store competitors included Dillards, Macys and J.C. Penney. Grocery store competitors included Kroger, Supervalu and Safeway. The major membership-only warehouse competitor was Costco Wholesale. Wal-Mart became a publicly traded firm in 1970 with an initial stock price of $16. 50 per divide and subsequently, in March 1974, declared its first cash dividend of $0.05 per share (after two two-for- unitary 1This case has been written on the basis of published sources only. Consequently, the interpretation and perspectives presented in this case are not necessarily those of Wal-Mart Stores, Inc. or any of its employees.Analysts generally believed that Wal-Mart would hatch to be successful in consistently increasing profits, resulting in the consensus annual earnings produce forecast of 10.40 per cent for the next phoebe bird years. As of February 2010, according to Bloomberg L. P., Wal-Mart shares were ranked as buys in the coming six to 12 months by 20 analysts, holds by 7 analysts andsells by none of the analysts. These rankings (which amounted to an number of 4.41 on a five-point scale) currently exceeded the average buy/hold/sell mix among Standard Poor (SP) 500 firms (at 3.94) and among the hypermarkets and supercenters subindustry (at 4.23). Analyst s consensus projected Wal-Marts target price was $60.50 per share, relative to a juvenile closing price of $53.48 per share.Over the 2010 fiscal year, Wal-Mart shareholders had generated a total return (including dividends) of 9.69 per cent, and the consensus stock price forecast ranking (as careful by buys/holds/sells) was above that of the overall market. Wal-Marts 52-week high stock price was $55.01 per share and the 52-week low was $46.42 per share. Gupta noticed that Wal-Mart shares had a price-to-trailing earnings (P/E) ratio of 14.40 times (based on the last four quarters of earnings) and an indicated dividend yield (based on the current 2010 quarterly dividend and current stock price) of 2.0 per cent. Exhibit 2 presents a graph of Wal-Marts stock price for 10 years, and Exhibit 3 provides historical dividend data. In determining whether Wal-Mart was fairly valued, Gupta decided to focus on valuation concepts she had been introduced to in her university business courses and in one of her firms training courses the dividend discount model, the capital asset pricing model (CAPM) and price/earnings multiples.DIVIDEND DISCOUNT MODELSDividends in Perpetuity harmonise to the dividend discount model (DDM), the current stock price of Wal-Mart represents the present value of all expected future dividends, discounted at an investors required (or expected) rate of return. beneath this approach, a share is valued by forecasting dividends in perpetuity, which is not an easy task.To simplify the daunting task of estimating all future dividends, a egression trend of the dividends can be used in a much simpler version of the model, which is known as the never-ending festering dividend discount model. According to the constant growth DDM, the current value of a firms stock price (P0) is equal to next years (expected) dividend (D1) divided by an investorsrequired rate of return (Ke) minus the expected perpetual dividend growth rate (g).P0 = D1/ (Ke g)Alternatively , by rearranging the model, the required return can be decomposed into two split the expected dividend yield (i.e., the dividends anticipated over the next four quarters divided by the current stock price) plus the expected future growth in dividends.Ke = D1/P0 + gIn other words, the required return can be thought of as both a dividend portion and a growth portion that are reflected in future capital gains.Authorized for use only by robert lamour in Finanical Analysis at California State University due east Bay from Jun 01, 2014 to Aug 29, 2014. Use outside these parameters is a copyright violation.stock splits). It had undergone 11 two-for-one stock splits, and thus, an original lot of 100 Wal-Mart shares had grown to 204,800 shares after the most recent split in April 1999.9B11N004Anticipated dividend growth (g) is often estimated in a variety of ways. First, observed historical dividend growth can be assumed to continue in a perpetual fashion. Second, future dividend growth ca n be estimated on the basis of recent estimates of analysts. Gupta noted that the consensus annual Wal-Mart dividend for fiscal year 2011 was $1.21, and one respected analyst had estimated the expected constant dividend growth (in perpetuity) at approximately 5.0 per cent. When a firm achieves its steady state (i.e., when the annual return on fair-mindedness is just equal to its cost of equity capital), the sole determinant of the growth in dividends is the annual dividend payout ratio. If all dividends are paid out, the firms assets do not increase and therefore the dividend stream will not grow.