In his interview at WealthTrack with Consuelo Mack, Steven Romick discussed why he likes companies such as CVS/Caremark (CVS), Wal-Mart (WMT) and Microsoft (MSFT). Especially he thinks that Wal-Mart stock is cheaper than it was at the market bottom of March, 2009.
Wal-Mart stock was traded at as low as $46.5 in March 2009. It appreciated about 15% to today’s $53.7 over the past two 27 months. Why is it cheaper today? Because Wal-Mart’s earnings per share has grown by more than 15% during the past 27 months. Since the fiscal year ended in Jan. 2009, Wal-Mart has grown its total revenue by 5%. The company’s net profit margin expand from 3.3% to 3.9%. Its earnings has grown 23%. In the meantime, Wal-Mart has retired more than 11% of its shares during the past 27 months. Therefore its earnings per share has grown 34% over the past 27 months.
We can understand this by looking at the valuation matrix of Wal-Mart stock from different angles using the ratios in 10-year valuations of Wal-Mart stock.
P/E ratio is the direct measure of the valuation of the stock. Although P/E ratio is a poor indicator of the valuation for cyclical stocks, it is a good indicator for predictable companies like Wal-Mart.
Below is a screenshot of the historical P/E ratio of Wal-Mart stock in GuruFocus 10-year valuation page. We can see that Wal-Mart is traded at a historical low P/E of 11.6. In March 2009 its P/E is about 14. Therefore the stock is having 20% lower P/E than 27 months ago.
Similarly, Wal-Mart stock price/sales (P/S) ratio has never been lower. Currently the P/S ratio is about 0.45. In March 2009 the ratio was about 0.47. Please see the chart below:
The same applies to the stock’s price/book ratio (P/B). Currently the P/B ratio is about 2.8. It has never been this low before.
With the stock price decline and the boost of per share dividend, Wal-Mart stock is now traded at the highest dividend yield level in its history. Since 1999, the company has issued 12 dividend hikes — pushing its payout higher by a total of 630% — including a 21% increase in March, which registered as the largest raise given to shareholders in four years. The dividend yield is now approaching 3% for the first time ever.
With the lowest historical valuation, Wal-Mart stock is traded at the lowest end of the valuation bands, as indicated in GuruFocus 10-year valuation page and the chart below.
With undervalued stock price, Wal-Mart has been aggressively buying back its shares. In 2002, Wal-Mart had about 4.5 billion shares outstanding. Today it has only 3.5 billion. The company retired 1 billion shares over the past 10 years. Since last year, the share buyback is further accelerated. In 2010 alone, Wal-Mart bought back 6% of its shares.
This is the history of shares outstanding. The chart is from GuruFocus 10-year financial page for Wal-Mart:
Fair Value Estimate
Using GuruFocus discounted cash flow calculator, we estimate that Wal-Mart has a fair value of $110, suggesting a margin of safety of about 50%. A more conservative assumption of 10% EPS growth rate over the next 10 years, 3% terminal growth rate and total neglect of its book value gives a fair value of $78, still 32% of margin of safety!
No wonder why Steven Romick said the stock is undervalued. It is indeed traded at lowest historical valuation ever.
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