The stock of Walmart (NYSE:WMT, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $138.28 per share and the market cap of $389 billion, Walmart stock shows every sign of being modestly overvalued. GF Value for Walmart is shown in the chart below.
Because Walmart is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 5.7% over the past three years and is estimated to grow 1.55% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. Walmart has a cash-to-debt ratio of 0.28, which ranks in the middle range of the companies in the industry of Retail - Defensive. Based on this, GuruFocus ranks Walmart's financial strength as 6 out of 10, suggesting fair balance sheet. This is the debt and cash of Walmart over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Walmart has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $559.2 billion and earnings of $4.73 a share. Its operating margin is 4.03%, which ranks in the middle range of the companies in the industry of Retail - Defensive. Overall, the profitability of Walmart is ranked 7 out of 10, which indicates fair profitability. This is the revenue and net income of Walmart over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of Walmart is 5.7%, which ranks in the middle range of the companies in the industry of Retail - Defensive. The 3-year average EBITDA growth rate is 8.7%, which ranks in the middle range of the companies in the industry of Retail - Defensive.
Another method of determining the profitability of a company is to compare its return on invested capital to the weighted average cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, Walmart's return on invested capital is 8.14, and its cost of capital is 3.43. The historical ROIC vs WACC comparison of Walmart is shown below:
In short, Walmart (NYSE:WMT, 30-year Financials) stock is believed to be modestly overvalued. The company's financial condition is fair and its profitability is fair. Its growth ranks in the middle range of the companies in the industry of Retail - Defensive. To learn more about Walmart stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
