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Always Low Prices?

July 30, 2014 | About:

Walmart (WMT) is the largest retail chain in the United States and has been growing globally. Walmart prides itself on offering low prices to its customers. This commitment to its customers is one of the reasons why me and my wife try to do as much shopping as we can at Walmart. This is a tough task an a NYC resident, but the quality and affordability makes WMT a great company to be a customer of. Can the quality of the company add value to an investor? If it does, is WMT affordable, or is it overpriced?

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To add value to an investor, a business has to increase a shareholder’s wealth in at least one of two ways. One is through capital appreciation, where the investor can sell the company for a higher price later on. The other is through the payment of dividends. Since 1974, WMT has been increasing its dividend, which is remarkable. This shows both confidence in the future prospects of the company and a commitment to their shareholders. The 10 year dividend growth rate of WMT is 18.1%, which is very exciting for both current shareholders and prospective ones. With a current dividend yield of 2.5%, WMT has a solid and growing dividend that investors can count on. Walmart has also introduced a really cool tool for customers. Customers can use the Savings Catcher to compare the prices they’ve paid at WMT to Walmart’s competition. If the Savings Catcher finds a better price, the customer gets the difference in a Walmart gift card. This is a great way to show that they really do have the lowest prices, are willing to prove it, and will hopefully entice customers to use their gift card for future Walmart purchases.

Looking through WMT’s cash flow statement, we see that the company continues to look solid. Although cash flow from operating activities was from $25.5 billion in 2013 to $23.2 billion in 2014, representing a 9.1% decrease, WMT is able to cover both short and long term debt comfortably while funding its global expansion. Their overall cash position did decrease from $7.7 billion in 2013 to $7.2 billion in 2014, a 6.4% decline. These aren’t necessarily alarming figures. What is alarming is Walmart’s excuse of “bad weather” as the reason for the decline in profits for their first quarter of 2015. However, lets look at some more charts and numbers and put it all together.

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Using Gur Focus' interactive charts, we see that Walmart is currently priced at 3.37 times its book value. This isn’t always a red flag for a company, especially a strong company like Walmart. Sometimes it is worth paying a little premium for strong and reliable businesses. What may be a red flag is WMT’s price to free cashflow ratio of 20.72. I usually wouldn’t want to pay more than 15 times a company’s free cashflow generating ability. What is a little more surprising is that WMT is trading at 15.6 times its earnings. Although WMT is generating higher profit compared to its price, it isn’t generating as much cash for the same price. Walmart’s free cash flow per share is $3.09.

When we input the free cash flow per share of $3.09 into Guru’s DCF model, we get a fair value of $41.63 with a margin of safety of -80%, without adding tangible book value. Walmart seems very overpriced to me. Customers can rest assured that Walmart will always have low prices. Investors shouldn’t.

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Rating: 3.3/5 (4 votes)

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Comments

Dr. Paul Price
Dr. Paul Price premium member - 4 months ago
Michael,

WMT hasn't traded as low as your calculated 'fair value' price for even one day in more than fifteen years (source: Value Line).

Wal-Mart's dead low in the Crash of 2008 was $43.10, a year when full year EPS were $3.42, well below where they are today. 2008's dividend was $0.95 versus $1.92 at present.

Perhaps it is your formula that is out of whack, rather than the market's view of WMT's true value.

A young man named Warren Buffett (Trades, Portfolio) appears to disagree with your conclusion based on his enormous stake in WMT, held through Berkshire Hathaway.





Michael Hamlett Jr
Michael Hamlett Jr premium member - 4 months ago

Personally, I think the whole market is overvalued, and sometimes the market isn't right in its valuations. I also wasn't using EPS, but FCF, as I think its a better gauge to a businesses cash generating abilities. Warren Buffet started buying WMT in 2nd quarter 2005, when WMT's price was around $47 dollars a share. If he adds to his position now then he's just compounding on his returns. An investor buying WMT now is definitely not going to realize the same returns as Warren. http://www.gurufocus.com/news/666/warren-buffett-buys-walmart-reveals-stakes-in-anheuser-busch

nycwerewolf
Nycwerewolf - 4 months ago

Square root of 22.5 x EPS (4.84) x Book Value (22.63) = 49.64 which means the best longterm entry point for WMT would be 65% below that number at 17.37

Mr. Hamlett Jr.'s analysis is correct no matter how you slice it whether the stock ever drops down to those prices or not. No margin of safety here other than the fact that Obama & HRC have ties to the company. The P/B is also quite high vs the current ratio. It's also worth noting that Div Yield + Profit Margin %/Price to Book gives you a number below 2 which is unacceptable from a LT investing pov.

Great work, Mr. Hamlett. And I agree with your sentiments about the market overall. Lots of people out there who call themselves "value investors" & clearly have no idea what they are talking about. Please let us know if you have a website because we're on the same page. ;)

Michael Hamlett Jr
Michael Hamlett Jr premium member - 4 months ago
Thanks NYCwerewolf. My website is http://www.thelionsshares.com/
Michael Hamlett Jr
Michael Hamlett Jr premium member - 4 months ago

Thanks NYCwerewolf! My website is http://www.thelionsshares.com/

nycwerewolf
Nycwerewolf - 4 months ago

Awesome! Thanks!

irie267
Irie267 - 4 months ago

"It's also worth noting that Div Yield + Profit Margin %/Price to Book gives you a number below 2 which is unacceptable from a LT investing pov." - What measurement is this?

"Square root of 22.5 x EPS (4.84) x Book Value (22.63) = 49.64 which means the best longterm entry point for WMT would be 65% below that number at 17.37" - I understand that this is Graham's number, but where did the 65% discount come from?

Im just curious about these things.

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