1. How to use GuruFocus - Tutorials
  2. What Is in the GuruFocus Premium Membership?
  3. A DIY Guide on How to Invest Using Guru Strategies

Why Steven Romick Thinks Wal-Mart Stock Is Cheaper Than It Was in March 2009

July 06, 2011 | About:

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

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.


P/S Ratio

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:


P/B Ratio

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.


Dividend Yield

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.


Valuation Band

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.


Share Buyback

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.

Note: if you have not tried our discounted cash flow calculator, please try it, it is Free. Also every row of 10-year financial pages are clickable, you can look at the data more visually in charts. It is also Free. GuruFocus 10-year valuation pages are for Premium Members only. If you are not a Premium Member, we invite you for a 7-day Free Trial.

About the author:

Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

Rating: 4.1/5 (50 votes)


Please leave your comment:

GuruFocus has detected 4 Warning Signs with Wal-Mart Stores Inc $WMT.
More than 500,000 people have already joined GuruFocus to track the stocks they follow and exchange investment ideas.

Performances of the stocks mentioned by gurufocus

User Generated Screeners

sunnywhyPure Tech
Get WordPress Plugins for easy affiliate links on Stock Tickers and Guru Names | Earn affiliate commissions by embedding GuruFocus Charts
GuruFocus Affiliate Program: Earn up to $400 per referral. ( Learn More)

GF Chat