Valuing Wal-Mart Essay Example for Free

Valuing Wal-Mart EssayIn early February 2010, Sabrina Gupta, an investment advisor with a major brokerage souse, was examining Wal-Mart Stores, Inc. (Wal-Mart) sprout and its valuation. Gupta wondered whether to recommend the received to any 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 Sam Walton, Wal-Mart was the worlds largest retailer, operating to a greater extent 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 meditation agreements in China and a stake in a leading Japanese retail chain. Worldwide, Wal-Mart had 2.1 cardinal employees (known as associates), who served more than 200 million customers each week. During the fiscal twelvemonth ended January 31, 2010, Wal-Marts clear up sales wer e more than US$405 billion. Exhibit 1 presents a summary of Wal-Marts 2009and 2010 financial statements. Wal-Marts st computegy was to provide a broad assortment of quality production and services at mundane low prices.It was best known for its discount stores, which offered merchandise such as apparel, small appliances, housewares, electronics and hardware, but also ran combined discount and grocery stores (Wal-Mart Supercenters), membership-only warehouse stores (SAMS Club) and smaller grocery stores (Neighborhood Markets). In the general merchandise area, Wal-Marts competitors include 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 menage in 1970 with an initial billet price of $16.50 per share an d subsequently, in March 1974, declared its first specie dividend of $0.05 per share (after devil two-for-one 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 continue to be palmy in consistently increasing profits, resulting in the consensus annual earnings growth forecast of 10.40 per cent for the attached five 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 honest 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). Analysts consensus projected W al-Marts pose price was $60.50 per share, relative to a recent closing price of $53.48 per share.Over the 2010 fiscal year, Wal-Mart shareholders had generated a extreme return (including dividends) of 9.69 per cent, and the consensus stock price forecast ranking (as measured 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 multiplication (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 contrast courses and in one of her firms training courses the dividend discount bewilder, the capital asset pricing model (CAPM) and price/earnings multiples.DIVIDEND DISCOUNT MODELSDividends in Perpetuity fit in to the dividend discount model (DDM), the current stock price of Wal-Mart represents the present value of all expected prospective dividends, discounted at an investors required (or expected) rate of return. Under this approach, a share is valued by forecasting dividends in perpetuity, which is not an easy task.To alter the daunting task of estimating all future dividends, a growth trend of the dividends can be used in a much simpler version of the model, which is known as the constant growth dividend discount model. According to the constant growth DDM, the current value of a firms stock price (P0) is refer 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 mod el, the required return can be decomposed into two parts 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 different 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 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 intimately recent split in April 1999.9B11N004Anticipated dividend growth (g) is often estimated in a variety of ways. First, observe historical dividend growth can be assumed to continue in a perpetual fashion. Second, future dividend growth can 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 law 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.