I believe $WMT, at approximately $57/share is fairly valued with a margin of safety on a cash flow valuation basis.
Wal-Mart is the largest retailer in the United States and is gaining ground internationally. The firm is divided into three segments: Wal-Mart U.S. (63% of revenue, 3,800 stores), international (24%, 4,200), and Sam's Club (12%, 600). Wal-Mart U.S. revenue consists primarily of grocery (49% of revenue), entertainment goods (13%), and hardlines (12%).
(Source: Morningstar.com)
Wal-mart Looks Abroad for Growth
I estimated the firm's WACC at 6.65% using the Capital Asset Pricing Model and the company's recent SEC filings. ValuePro has a baseline WACC calculator here and it calculates the firm's WACC at 6.46%. I'll assume a slightly higher mark, 7.00%. Wal-Mart is the largest retailer in the United States and is gaining ground internationally. The firm is divided into three segments: Wal-Mart U.S. (63% of revenue, 3,800 stores), international (24%, 4,200), and Sam's Club (12%, 600). Wal-Mart U.S. revenue consists primarily of grocery (49% of revenue), entertainment goods (13%), and hardlines (12%).
(Source: Morningstar.com)
Wal-mart Looks Abroad for Growth
Recent free cash flows and noted growth rates:
| Year | FCF $Millions |
| 2001 | 1562 |
| 2002 | 1877 |
| 2003 | 3177 |
| 2004 | 5688 |
| 2005 | 2151 |
| 2006 | 3070 |
| 2007 | 4498 |
| 2008 | 5417 |
| 2009 | 11648 |
| 2010 | 14065 |
| TTM | 13456 |
Average Annual Growth: approx 39%
CAGR: approx. 28%
Consensus Forecast Industry 5-Year Growth: approx. 15% per year
Consensus Forecast Company 5-Year Growth: approx. 11% per year
CAGR: approx. 28%
Consensus Forecast Industry 5-Year Growth: approx. 15% per year
Consensus Forecast Company 5-Year Growth: approx. 11% per year
Assuming the company achieves a lower 5-year growth rate of 8% per year, and assuming that after the next five years, the company achieves no growth or 0% growth per year forever:
Discounted Cash Flow Valuation
| Year | FCF $ Millions |
| 0 | 13456 |
| 1 | 14532 |
| 2 | 15695 |
| 3 | 16951 |
| 4 | 18307 |
| 5 | 19771 |
| Terminal Value | 305043 |
The firm's future cash flows, discounted at a WACC of 7.00%, give a present value for the entire firm (Debt + Equity) of $286,681 million. If the firm's fair value of debt is estimated at $50,000 million, then the fair value of the firm's equity could be $236,681 million.
$236,681 million / 3560 million outstanding shares is approx $66 per share. A 20% margin of safety from here is approx $53 so assuming all else at $WMT meets my standard for good business, I'd buy it today for the long term at $53 or less.Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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