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Looking Into WAL-MART

The Company

Every week, 100 million customers visit Wal-Mart stores worldwide, making it

the worlds largest retailers. A leader in the discount industry, Wal-Mart posted $218

billion in sales last year as it continued to specialize in selling discounted household

goods. The company has 1.3 million employees working at 3,200 locations in the United

States and 1,100 locations in Mexico, Puerto Rico, Canada, Argentina, Brazil, China,

Korea, Germany, and the United Kingdom. Wal-Mart aims to instill its logo, Everyday

Day Low Prices in each and every division. Currently the company is broken down into

four divisions: Wal-Mart Supercenters, Discount Stores, Neighborhood Markets and

SAMS Club Warehouses. The magnitude and global presence of Wal-Mart allows it to

be a dominant player in the retailing market place. It is essential that fundamental

relationships within the industry and the companys environment need to be analyzed in

order to efficiently evaluate the correct market price for the companys stock (WMT

(NYSE)).

Industry Outlook

Household products, retail drugs stores, and personal care segments are expected

to produce above-average revenue growth and increase market share in the coming

months. The uncertainty between the U.S. and global economies should not affect the

sector because many of the products are basic necessities. The retail sector is expected to

perform in line with the overall market in the next 6-12 months.

Mega retailers such as Wal-Mart are expanding their product variety by focusing

on groceries and pharmaceutical drugs. To combat the market intrusion, Walgreen, CVS

and other drug stores are adding groceries to their shelves. The mass merchandising

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industry is only getting bigger as the major players are offering more selections in order

to gain a competitive edge. Many companies like Wal-Mart, Carrefour, Royal Ahold and

Kroger are expanding by acquisitions. The industry is getting larger while the number of

members is declining.

Porters Five Forces

Stable growth, expertise management, operating efficiency, and competitive

pricing make Wal-Mart a strong company when assessed using Porters Five Forces

Model. The model helps to evaluate the company by looking at the bargaining power of

the suppliers and buyers, the threat of substitute products or services, the potential threat

of new entrants and the rivalry among existing firms. Wal-Mart relies heavily on these 5

factors to ensure long lasting relations and customer satisfaction.

Suppliers

Wal-Mart, being a dominating customer to its suppliers, uses this as an advantage

for them. The company is the largest customer to companies such as Kraft Foods,

Gillette, and P&G. In order to maintain and satisfy Wal-Mart as a customer, suppliers are

willing to provide favorable payment terms, discounts, and priority delivery dates. These

mutual business relations are evident throughout Wal-Marts increasing success.

Buyers

Due to the fact that Wal-Mart is not monopolistic, the goods offered are

substitutable by competing organizations. It is the size of its stores and the wide selection

it carries daily, not to mention the quality emphasis it place on merchandises that allows

it to rank high in customer preference. Contrary to belief, customers of Wal-Mart have

bargaining power since Wal-Mart strives to satisfy its customers by matching the prices

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of any of its competitors. As Wal-Marts growth and profitability have shown, customers

are mostly satisfied with the chains low prices and convenient locations.

Threat of New Entrants

New entrants are always possible, but to seriously compete with Wal-Mart they

will need enormous capital. The company is expanding rapidly leaving less room for

new competitors. For the fiscal year ending 2004, the company plans to open 45 to 55

new discount stores and 200 to 210 new Supercenters domestically. Wal-Mart

International plans to open and or expand 120-130 units in existing markets becoming a

global phenomenon. With sales increasing at 12.3% in 2003, potential competitors to this

market will have to act quickly and have a highly effective business model to enter the

Wal-Mart dominated market.

Competition

Competition within the industry itself does not present a formidable threat to Wal-

Mart Inc. The company is larger and more profitable that the other few direct

competitors, namely Target, K-Mart which faced bankruptcy, and Costco who competes

with Wal-Marts SAMS Club division. Target represents the robust competitor for Wal-

Mart but unlike Wal-Mart, Target aims to sell upscale and trendier merchandise. With

1,494 stores owned by Target Corp. domestically, it does not present a major threat to

Wal-Mart global stores, but fair competition to the domestic stores. In summary, Wal-

Mart is ahead of the competition and overall, the leader in the industry with a secure

market position.

Beyond the fundamentals of the companys position within the industry, financial

ratios like the After tax profit, Return on Assets (ROA), Return on Equity (ROE) and

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current quick ratio need to be derived. This is to determine a more accurate financial

valuation of the company in comparison to the stock price. In addition, evaluating the

financial ratios of Wal-Mart would be most pertinent in the provision of a fair stock

valuation of the company.

Profitability Ratios

After-tax Profit Margin

The After-tax profit margin is an income statement ratio. This ratio is formulated

by dividing the annual net income by the annual sales revenue (turnover). This ratio

simply reflects the profit margin a company obtains from its products and services. A

high ratio does not necessarily mean that a company is performing well, as different

industries have varying profit margins. However, within an industry this figure is more

relevant. For instance, comparing two similar firms, a firm with a higher ratio will

generally be more cost efficient, as it has extracted more profit then the other company.

Net income/Sales (Dollar amounts in million)

Industry Average = 3.48%(From http://yahoo.multexinvestor.com)2003: 8,039/244,524=3.29%2002: 6,671/217,799=3.06%2001: 6,295/191,329=3.29%2000: 5,337/165,013=3.23%1999: 4,430/137,634=3.22%

(From http://www.walmartstores.com)

The five year average of After-tax profit margin for Wal-Mart is 3.22%. In

comparison, the entire industry average is 3.48%. The primary reason Wal-Mart is

slightly below the industry average is because Wal-Mart is a considered a low price retail

store that keeps lower margins on its product. Its profitability strategy is to generate mass

turnover to compensate for lower profit margins.

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Return on Assets

Return on assets (ROA) ratio is derived by dividing the annual Net income by the total

asset value of the company. This ratio highlights the level of return the companys assets

are providing and gives an indication of whether the assets are being utilized efficiently.

A higher ratio shows more profitability from the assets owned and managed.

Net income/Total assets (Dollar amounts in million)

Industry Average= 8.48%(From http://yahoo.multexinvestor.com)2003: 8,039/94,685=8.49%2002: 6,671/83,527=7.99%2001: 6,295/78,130=8.06%

2000: 5,337/70,349=7.59%1999: 4,430/49,996=8.86%(From http://www.walmartstores.com)

The five years average of ROA for the Wal-Mart is 8.20% where the industry

ROA five year average is 8.48%. This ratio suggests that Wal-Mart is leveraging its

assets not as effectively as some of its retailing competitors. From a valuation stance, this

ratio is good and as it shows a high level of efficiency, but suggests they could be more

efficient. Further, the 2003 figure is strong and shows continual strength of this ratio.

Return on Equity

The return on equity (ROE) ratio is the annual net income divided by the

shareholder equity value in the market. It represents the profitability in comparison to the

equity the company has issued. A larger ratio asserts that company performance has been

positive and is reflected by a higher income per share issued. This is a critical ratio when

assessing a stock value as is informs investors what the current and past return on equity

has been.

Net income/Shareholders equity

Industry Average= 20.68%

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(From http://yahoo.multexinvestor.com)2003: 8,039/39,337=20.44%2002: 6,671/35,102=19.00%2001: 6,295/31,343=20.08%2000: 5,337/25,834=20.66%

1999: 4430/21,112=20.98%(From http://www.walmartstores.com)

The five years average on ROE for Wal-Mart is 22.23% whereas the industry

norm has been 20.68%. The Wal-Mart ratio is similar to its competitors and has stayed

around 20% in recent years.

Asset-Utilization Ratios

These ratios are critical in evaluating a firms capability to use it fixed assets to

generate sales. These ratios are in multiples and are figures that show how many times

per year inventory turns over, or accounts receivables are received.

Receivable Turnover

Sales / Receivables (dollar amount in millions)

Industry Average = 10.97 x(From http://yahoo.multexinvestor.com)2003: 244,524/ 2,108 = 115.99 x2002: 217,719/ 2,000 = 108.85 x2001: 191,329/1,768= 108.23 x2000: 165013/1341= 123.05 x1999: 137634/1118= 123.11 x


Receivable turnover is a common utilization ratio that helps investors evaluate

efficiency and sales strength of companies. The ratio is vastly greater than the industry

and makes it a attractive factor for potential Wal-Mart investors.

Inventory Turnover

Sales / Inventory (Dollars in millions)

Industry Average = 6.21x

(From http://yahoo.multexinvestor.com)2003: 244,524 / 24,891 = 9.82 x

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2002: 217,719 / 22,614 = 9.62 x2001: 191,329/21442= 8.92 x2000: 165013/19793= 8.34 x1999: 137634/17076= 8.06 x


Again, Wal-Mart has shown superior strength in their ability to clear their

shelves faster than most other competitors in their industry. This means more sales

turnover, which filters to less holding and storage cost. There has been a positive growth

in inventory turnover, and once again, this positive ratio makes that stock more attractive

to investors.

Total Assets Turnover

Sales / Total Assets

Industry Average = 2.4 x(From http://yahoo.multexinvestor.com)2003: 244,524 / 94,685 = 2.58 x2002: 217,719 / 83,527 = 2.6 x2001: 191,329/78130= 2.45 x2000: 165013/70349= 2.35 x1999: 137634/49996= 2.75 x


Finally, Wal-Mart has also shown a strong ability to have return on sales in

relation to their total assets, among their peers. This ratio states that certain fixed assets

were able to generate a constant level of revenue. The higher ratio postulates a more

secure income flow for Wal-Mart and is a positive factor in valuing the stock

Liquidity Ratios

Current Ratio

The current ratio is of paramount importance when evaluating a company. It is

determined by dividing the current assets of a firm by its current liabilities. It indicates

whether the firm can pay off its short-term debt in an emergency by liquidating its current

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assets, and how fast the current assets are turned into cash during an ordinary cycle. The

higher the ratio is, the stronger the company financing and lesser the chance of the

company going into liquidation.

Current assets/Current liabilities (dollars in millions)

Industry Average=1.20(From http://yahoo.multexinvestor.com)

2003: 30483/32617=.932002: 28246/27282=1.042001: 26555/28949=.922000: 24356/25803= .941999: 21132/16762= 1.26


The five year average current ratio for Wal-Mart is 0.94, and 1.20 for the industry

as a whole. Wal-Marts current ratio is less than one, which means that by selling out its

current assets in an emergency, it still would not be able to cover its liabilities. This ratio

would have a heavy bearing on the investor motivation to invest in Wal-Mart. The fear of

not being able to cover its liabilities in the event of an unforeseen circumstance may deter

investors from purchasing the stock.

Quick Ratio

The Quick ratio is the current assets minus the inventory divided by current

liability. It demonstrates the firms ability to pay off its short-term debt in an emergency

by liquidating its most liquid assets like cash, marketable securities and receivables. The

higher the ratio is, the better the company financing.

(Current assets-inventory)/Current liability

Industry Average = 0.36(From http://yahoo.multexinvestor.com)

2003: (30,483-25,056)/32,617=0.16642002: (27,878-22,749)/27,282=0.1882001: (26,555-21,644)/28,949=0.16962000: (24356-19793)/ 25803=0.17681999: (21132-17076)/ 16762=0.2419

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The five years average of quick ratio for Wal-Mart is 0.19 and the five years

average of quick ratio for the industry is 0.36. Wal-Marts lower quick ratio is caused by

Wal-Marts high investment in inventory. However, Wal-Marts high inventory is needed

because if they do not have the item in stock the customer will go to a competitor such as

Target to get it. It is well known that keeping a customer is cheaper than getting new

ones; thus Wal-Mart does not want to lose any of its customers.

Net working capital to total assets

This ratio is part of the group of ratios that help paint a picture concerning a

companys liquidity. Net working capital measures of current assets less short-term

obligations minus the firms total assets. This formula is a great component to help figure

out a companys credit. The higher the ratio, the better the companys credit rating will

be. A companys credit can be said to improve, in part, if there is a trend in this ratio

increasing over time.

(Current assets current liabilities) / Total Assets

2003: (30,483 32,617) / 94,685 = -.02252002: (27,878 27,282) / 83,527 = .00712001: (26,555 28,949) / 78,130 = -.03062000: (24356-25803)/ 70349= -.02011999: (21132-16762)/49996= .0874


Other factors not included, Wal-Marts current numbers seem to indicate a not so

optimal level of liquidation. Although 2003 was better than the ratio in 2001, the

company has had a roller coaster trend, from negative to positive and back to negative.

This could be seen as a sign of weak credit. Yet, it is very important to look at the big

picture and include other variables that help explain why this ratio is where it is. These

external factors might include economic conditions, legal issues, interest rates etc.

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Debt-utilization Ratios

Long-term debt to equity

These ratios reflect the degree of financial leverage a firm is using. More

specifically this ratio focuses on the capital structure of a company, and its reaction to

changes in revenue with its existing use of debt and capital structure. The higher the ratio

the higher financial leverage is used by the company, a higher percentage of capital

budgeting is financed by debt versus equity on average. This is a percent of debt over

equity.

Long-term Debt / Stock Holders EquityIndustry Average= .63(From http://yahoo.multexinvestor.com)

2003: 16,607 / 39,337 = .42222002:15,617 / 35,102 = .44492001:12,501 / 31,343 = .39882000:13672/25834=.52921999:6908/21112=.3272


Any debt, which companies issue or take, becomes liabilities to the company.

Furthermore, theses risks are directly transferred to the shareholders. So, it is inherent

that the more debt financing the more risk is present. Yet it is critical to understand what

type of firm we are talking about, industry, and position of firm being assessed. High debt

structure for Wal-Mart is not necessarily a bad thing. Actually, it may be the most

profitable for their capital budget. Although, for other companies that are cyclical such as

airlines having a high debt structure is almost fatal as we have recently seen. In relation

to the industry average of .63, Wal-Mart is doing much better than the average. This

means that as a percentage Wal-Mart is using less debt in relation to their equity. This

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gives them flexibility by not being held down to obligations. In addition, it gives them

opportunity to borrow more money if needed.

Price Ratios

Price to earnings

Price ratios are used to help evaluate what investors believe the price is to actual

figures of earning and equity. These are one of the most critical groups of ratios because

it is often hard to determine what a companies stock should trade at. Using these ratios, it

is possible to get some understanding about where on the spectrum of investments does a

stock lie. In addition, it help to put in perspective stock prices with changing earnings and

equity, so investors have some reference point to help them accurately value a stock. For

example if a stock has a P/E of 20 that means it is trading at 20 times it earnings. Well if

investors are comfortable with such a P/E, investors have a better idea of what the stocks

should trade at, if earnings were to rise or fall.

Price / Earnings

Industry Average = 31.1(From http://yahoo.multexinvestor.com)

Jan 2, 2003: $51.60 / 1.81 = 28.51 Jan 2, 2002: $58.05 / 1.49 = 38.96

Jan 2, 2001: $53.88 / 1.41 = 38.21(From http://www.walmartstores.com)

Price to earnings is one of the most recognizable ratios among investors because it

gives investors some type of reference to a stocks price and infers a lot about what type

of risk is involved. Typically a lower P/E is viewed as a less risk and more conservative

investment than one with a high P/E. A P/E can also signal to other investors what the

current trend is amongst investors. Stocks that trade at high P/Es are many times seen to

pose some chance of making substantial profits at some time. Investors seem to believe

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that Wal-Mart is best traded at 28 times it earnings, much lower multiple than it traded

two years ago. This might also mean that the stocks are undervalued and have room to

rise. As related to the Industry average, Wal-Mart is actually trading at a higher multiple

than its closest competitors. This may be due to many reasons, including but not limited

to, investors favoring Wal-Mart, news, and expectations of future strength and earnings

and external economic conditions.

Price to book value

Common stock price / Book value per share

Industry Average = 6.3

(From http://yahoo.multexinvestor.com)Jan 2, 2003: $51.60 / $8.89 = 5.8Jan 2, 2002: $58.05 / $7.86= 7.38

Jan 2, 2001: $53.88 / $7.02 = 7.67(From http://www.walmartstores.com)

With this ratio, a lower number signifies a company that has more of its stock

price in higher correlation to its actual worth. As seen with Wal-Mart, this ratio has

lowered over the past years, signifying a stronger and possibly a safer stock, because so

much more of its value is real, and not interpreted by other investors. Related to other

companies, Wal-Mart has a higher average ratio.

Dividends to price or (Dividend yield)

Dividends per share / Common stock price

Industry Average = .60%(From http://yahoo.multexinvestor.com)Jan 2, 2003: $.30 / $51.60 = .58%Jan 2, 2002: $.28 / $58.05 = .48%Jan 2, 2001: $.24 / $53.88 = .45%


This ratio is vertical, yet it is open to a lot of interpretation and variation.

Dividend policy among firms differs greatly. Investors also view dividends in different

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regards. The Dividend yield is the percentage of a cash payment of return by purchasing

the stock. Although some who believe in the bird in hand theory, view a higher yield and

a higher payout ratio as a more positive attribute, other believe lower dividends and

higher reinvestment that leads to higher capital gains is more beneficial. This primarily

goes back to taxes and the fact that capital gains tax is much lower than personal income

tax, which dividends are taxed at. Wal-Mart has a lower dividend payout, in relation to

other stocks. Wal-Mart probably has many positive NPV projects, which it would like to

invest in. In that case, investors are better off with a lower dividend yield and a higher

appreciation on their stock. This is true for most other stock in Wal-Marts industry, with

the average only .60% it is hard to say that any investor buys these industries stocks with

any hopes of earning a major return of dividends alone. Dividend policy varies so much

between companies that it is hard to judge companies against one another on dividend

policy alone.

Valuation

Ratios are very helpful in determining the health of a company. Ratios can help

determine if a company is in financial trouble, near bankruptcy, moving in a positive

direction, and experiencing growth. However, ratios cannot determine if the stock is

currently undervalued in the market place or overvalued. In order to determine this,

several different valuation models must be employed. These models include non-

constant growth, constant growth, income statement method, combined earnings and

dividend, and four different average price models.

Capital Asset Pricing Model

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In order to use any of these models, the cost of equity must be determined. The

capital asset pricing model is a model that helps find an appropriate cost of equity for a

company. The CAPM uses the risk-free rate, beta, and market risk premium to derive the

cost of equity (Ke = Rf + Rm). The risk-free rate used to determine the cost of equity

was the ten year U.S. Treasury Bond(3.43%). Any shorter treasury bond will give an

inaccurate estimate because rates are presently low ; the cost of equity will be lower but

this is not sustainable because rates will eventually increase and we are looking for long-

run estimates.

The beta in the equation is the individual companys risk. The beta for Wal-Mart

was found using Value-Line. Their beta which was 0.89, means Wal-Mart is a less

risky investment than the market. This is very good for risk-adverse investors.

The market risk premium is 8.3% found from Standard and Poors.

Containing these figures, the cost of equity for Wal-Mart is 10.8% (Ke = 3.43% + .89 x

8.3%).

Constant Growth Model

The constant growth model assumes that dividends will increase by the same

increment every year. The equation used is Po D1/ (Ke-g). This equation also assumes

that the cost of equity is greater than the dividend growth rate. For Wal-Mart this is not

true. Using the growth rate of 12%, as projected by Value-Line, the equation cannot be

solved because Wal-Marts cost of equity is only 10.8%.

*Constant Growth Model

Po=D1/(Ke-g) Po = .32/(.108-.12)

*This model cannot be used because the cost of capital is less than the growth rate.

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Non-Constant Growth Rate

The non-constant growth model is used for companies who do not have a constant

growth in dividend payments. This model uses two different growth rates, one for the

coming years and one for all years. Future years, the dividends are summed and the total

is discounted back to its present value. In order to determine dividends to infinity, the

constant growth model is used and these are discounted back to present value as well.

Then the two numbers are added together. Wal-Mart has a projected growth rate in

dividends for the next five years, but they do not project indefinite growth in dividends.

So, for the purpose of this valuation technique we used the projected 12% growth rate in

dividends for the next five years and an 8% growth rate there after. It is assumed that

Wal-Marts growth will slow down because they are entering the maturity stage of the

industry life cycle. They operate in almost every state and several countries, so there are

not nearly as many expansion opportunities as there once were. Using these two growth

rates the stock price of Wal-Mart should be valued at $36.70 (see below for calculation).

This means that Wal-Marts stock is currently overvalued because it is trading at $52.92

as of May 18th 2003.

.

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Income Statement Method

The income statement method uses sales times after-tax profit margin to

determine earnings, which are then divided by shares outstanding to get the earnings per

share. These earnings per share are multiplied by the P/E ratio to determine the stock

price. Historical numbers and growth rates are used to derive the future years sales and

margins. For Wal-Mart, the growth rate used for sales was 12% and the projected profit

margins are 3.5%, both of which were determined using Value-Line. The final analysis

indicates that the stock price should be $59.72 in 2003 and $72.77 in 2004 (see below).

These numbers indicate that the stock is currently undervalued and is a good purchase.

Income Statement Method

Non-Constant Growth Model

Year Dividend PV

2003 0.32 0.288809

2005 0.3584 0.323466

2006 0.401408 0.362282

2007 0.449577 0.405755

1.3803112008 1.4907362

Po = D1/(Ke-g)Po = 1.49/ (10.8% -8%) 53.24058 35.32513

Po= 36.70544

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Year Sales*

After-TaxProfitMargin** Earnings Shares EPS

P/ERatio

StockPrice

1998 137,634 3.20% 4404.288 4482 0.982661 31.2 30.66

1999 165,013 3.50% 5775.455 4457 1.295817 39.1 50.672000 191,329 3.30% 6313.857 4470 1.412496 38 53.67

2001 217,799 3.10% 6751.769 4453 1.516229 34.9 52.92

2002 245,000 3.30% 8085 4414 1.831672 30.4 55.68

2003e 273,000 3.30% 9009 4375 2.0592 29 59.72

2004e 305,760 3.50% 10701.6 4265 2.509168 29 72.77

* Growth rate = 12%

** Projected profit margins for '04-'07= 3.5%

The Combined Earnings and Dividend Model

The current price of Wal-Mart as of May 18, 2003 is $ 52.92. Using the

Combined Earnings and Dividend Model, the price of Wal-Mart seems to be overvalued.

For the Combined Earning and Dividend Model the estimated EPS Growth rate used was

found through Value Line. The Payout Ratio estimate was found through Yahoo Finance

and PV factor was calculated through CAPM. The actual calculations of this model can

be seen in below. This model combines dividend stream plus a market price at the end of

the dividend stream to give the value of the stock. For Wal-Mart it is observed that due to

a low stream of dividend, this model would project that Wal-Mart is overvalued. This

model calculated 2003 stock price to be $48.94 and 2006 to be $54.16. Looking, at these

figures it can be shown that for this model the current stock price should not be as high as

it is until future years.

mbined Earnings and Dividend Model

ar Estimated EPS Growth (14%) Payout Ratio(16.18%) Estimated DPS PV Factor (10.81%) Present Value of Cash Flow

2002 1.8 0.1618 0.29124 0.902445628 0.26282826

2003 2.052 0.1618 0.3320136 0.814408111 0.27039457

2004 2.33928 0.1618 0.378495504 0.734959039 0.27817869

2005 2.6667792 0.1618 0.431484875 0.663260571 0.2861869

2006 3.040128288 0.1618 0.491892757 0.598556602 0.29442566

art A 1.39201409

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art B

2006EPS P/E Price 2006 PV Factor

3.04 29 88.16 0.598556602 52.7687501

Estimated 2006 Earning Per Share x P/E Ratio = Price 2006 x PV Factor+ Part A= 54.1607641

Other Valuation Models Using Average Price Ratios

All the information for: Sales per share, Dividend per Share, Earnings per Share,

Cash flow per Share, and Book value per share where taken from Value Line. Stock

Price high and low and P/E ratios high and low were taken from Standard and Poors

analysis for Wal-Mart. The nine-year average was then taken and used to calculate

various valuation models. Adding the average high and low, stock price and dividing by

two is how the average stock price was found. In this instance, it is $32.81 for year 1994-

2002. This number was then used in the calculation below. The Price to Dividend per

Share came out to be $59.80 for 2003, inferring that the stock is undervalued by about

$6.88. The Price to Earning per Share is $62.98 for 2003 also showing that Wal-Mart

Stock is undervalued. The Price to Cash Flow per Share is $62.39 and thus concluding

that Wal-Marts stock is undervalued. The Price to Book Value per Share also shows the

stock to be undervalued. These four valuation show that Wal-Marts stock for 2003

should range from $59.80 to 63.49, thus being undervalued anywhere from $6.88 to $

10.57. All calculation can be viewed below.

r Sales Price per Share Dividend Per Share Earnings per Share Cash Flow per Share Book value per Share Stock Price P/e R

High Low High L

1994 17.96 0.09 0.59 0.82 2.77 14.62 10.5 25

1995 20.42 0.1 0.6 0.88 3.22 13.81 10.3 23

1996 22.87 0.11 0.67 0.99 3.74 14.12 9.54 21

1997 26.32 0.14 0.78 1.15 4.13 20.96 11 27

1998 30.71 0.15 0.99 1.41 4.71 41.37 18.8 42

1999 37.02 0.19 1.28 1.81 5.8 70.25 38.7 56

2000 42.8 0.23 1.4 2.05 7.01 69 41.4 49

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2001 48.91 0.27 1.5 2.25 7.88 58.75 42 39

2002 55.5 0.3 1.8 2.6 9.1 63.94 41.5 35

jected 2003 62.4 0.32 2.05 2.95 10.4

ear Average 33.61222222 0.175555556 1.067777778 1.551111111 5.373333333 40.758 24.9 35.22

Average Stock Price 32.805

1) Price to Dividend per Share

Average price / Average DPS = Price to DPS Ratio x Est.2003 DPS= Projected 2003 Price

186.86392 59.79646

2) Price to Earning per Share

Average price / Average EPS = Price to EPS Ratio x Est.2003 EPS= Projected 2003 Price

30.722685 62.9815

3)Price to Cash Flow per Share

Average price / Average CFPS = Price to CFPS Ratio x Est.2003 EPS= Projected 2003 Price

21.149355 62.3906

4)Price to Book Value per Share

Average price / Average BVPS = Price to BVPS Ratio x Est.2003 BVPS= Projected 2003 Price

6.1051489 63.49355

Range of Price $59.80 to 63.49

All the valuation models for Wal-Mart using the dividend show that the stock is

overvalued. This seems to stream from the fact that Wal-Mart does not issue many

dividends because they are still in the expansion stage. They reinvest into creating more

stores around the country. This explains why the non-constant dividend growth model

and the combined earnings and dividend model are the only ones that show that the stock

is overvalued. The other valuations models like the Income Statement Method and the

Price Ratios to 9-year average show that the stock is undervalued. We conclude that the

stock is undervalued because it is a good buy for investors who are not looking for

immediate returns in the form of dividends. Those dividends seem to be used for a more

profitable reinvestment like expansion and becoming the market leader and discount

stores.

Conclusion

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Wal-Marts is a company who holds a dominant position in the retailing industry.

The price ratios for Wal-Mart gives a concrete indication to an investor of what the stock

price should be compared to actual figures of earning and equity. Wal-Marts price ratio

currently trades at 28 time its earning, which is higher than its competitors. However, this

can be partly explained by investors expectation on future strength and growth. Also, the

Price to book value for Wal-Mart has a lowering trend, which seems to show that it is

becoming a safer and a more stable stock to invest in. The Dividend yield for Wal-Mart is

lower than the industry average, signifying that Wal-Mart is using its cash revenue to

reinvest in the company. Wal-Mart is still viewed as a expanding company because of

their huge expansion plans for the upcoming years. Compared to its competition it has a

more robust operating foundation because of the management systems they have applied.

This has helped to create extraordinary turnovers for receivables, inventory, and assets. In

addition, all the Valuation models that did not include dividend showed that the stock

was undervalued. All these factors have supported Wal-Mart stock being a good buy. A

point of note is that numerous other factors can influence Wal-Marts stock price.

General market conditions, the economic climate and geo-political tensions (e.g. Iraq

war) are just a few influences on its stock price. More specifically, the retailing sector has

its particular influences that are generic to the sector and may not apply only to Wal-

Mart. For instance, poor Christmas spending by consumers would generally affect most

of the large retailers.

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