Current Price: ~ $61/share
Projected Yield: ~ 2.60%
Wal-Mart is the largest retailer in the world with more than $400 billion in annual revenue and fast approaching 10,000 stores across the globe. The company mainly operates supercenters, followed by wholesale warehouse clubs and also is testing a smaller store format for urban areas, which the company has yet to penetrate.
Estimated WACC for the firm today is 6.09% using the Capital Asset Pricing Model and the company's recent SEC filings.
Recent free cash flows and noted growth rates:
Year
|
FCF
$Millions
|
2003
|
3177
|
2004
|
5688
|
2005
|
2151
|
2006
|
3070
|
2007
|
4498
|
2008
|
5417
|
2009
|
11648
|
2010
|
14065
|
2011
|
10944
|
2012
|
10745
|
Average Annual Growth FCF: ~ 26%
CAGR FCF: ~ 15%
Consensus Forecast Industry 5-Year Growth: ~ 14% per year
Consensus Forecast Company 5-Year Growth: ~ 9% per year
Internal Growth Rate: ~ 6%
Sustainable Growth Rate: ~ 18%
Scenario 1
- Start at $10745 million FCF
- Assume a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:
Discounted Cash Flow Valuation
The firm's future cash flows, discounted at a WACC of 6.09%, give a present value for the entire firm (Debt + Equity) of $278429 million. If the firm's fair value of debt is estimated at $53043 million, then the fair value of the firm's equity could be $225386 million. $225386 million / 3430 million outstanding shares is approximately $66 per share and a 20% margin of safety is $53/share.
Year
|
FCF
$Millions
|
0
|
10745
|
1
|
11712
|
2
|
12766
|
3
|
13915
|
4
|
15167
|
5
|
16533
|
Terminal
Value
|
295841
|
The firm's future cash flows, discounted at a WACC of 6.09%, give a present value for the entire firm (Debt + Equity) of $278429 million. If the firm's fair value of debt is estimated at $53043 million, then the fair value of the firm's equity could be $225386 million. $225386 million / 3430 million outstanding shares is approximately $66 per share and a 20% margin of safety is $53/share.
Scenario 2
All else being equal,
All else being equal,
- Assume a 5-year growth rate in FCF of 9% per year, then 1% growth in FCF per year forever:
Discounted Cash Flow Valuation
Year
|
FCF
$Millions
|
0
|
10745
|
1
|
11712
|
2
|
12766
|
3
|
13915
|
4
|
15167
|
5
|
16533
|
Terminal
Value
|
353949
|
- Present Value of the entire firm (Debt + Equity): $321664 million
- Value of Equity: $268621 million or $78/share
- 20% margin of safety is $62/share
Sources
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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