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ModernGraham Valuation: Walmart Stores Inc. (WMT)

 

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Company Profile (obtained from Google Finance): Wal-Mart Stores, Inc. (Walmart) operates retail stores in various formats around globally. Everyday low prices (EDLP) is the Company’s pricing philosophy under, which it prices items at a low price everyday. The Company’s operates in three business segments: the Walmart U.S. segment, the Walmart International segment, and the Sam’s Club segment. During the fiscal year ended January 31, 2012 (fiscal 2012), its Walmart U.S. segment accounted for approximately 60% of its net sales and operates retail stores in various formats in all 50 states in the United States and Puerto Rico, as well as Walmart’s online retail operations, walmart.com. Its Walmart International segment consists of retail operations in 26 countries. Its Sam’s Club segment consists of membership warehouse clubs operated in 47 states in the United States and Puerto Rico, as well as the segment’s online retail operations, samsclub.com. During 2012, Sam’s Club accounted for approximately 12% of its net sales.

Defensive and Enterprising Investor Tests (What is the significance of these tests, and what is PEmg ratio?):

Defensive Investor – must pass at least 6 of the following 7 tests: Score = 5/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – PASS
  4. Dividend Record – has paid a dividend for at least 10 straight years – PASS
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – PASS
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 3/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – PASS
  4. Dividend Record – currently pays a dividend – PASS
  5. Earnings growth – EPSmg greater than 5 years ago – PASS

Valuation Summary (Calculator)

Key Data:

MG Value $101.49
MG Opinion Fairly Valued
Value Based on 3% Growth $69.00
Value Based on 0% Growth $40.45
Market Implied Growth Rate 4.07%
NCAV -$21.22
PEmg 16.65
Current Ratio 0.83
PB Ratio 3.61

Balance Sheet – 7/31/2013 

Current Assets $60,002,000,000
Current Liabilities $72,214,000,000
Total Debt $43,585,000,000
Total Assets $200,969,000,000
Intangible Assets $19,280,000,000
Total Liabilities $129,308,000,000
Outstanding Shares 3,266,000,000

Earnings Per Share – Diluted

2014 (estimate) $5.12
2013 $5.02
2012 $4.54
2011 $4.18
2010 $3.72
2009 $3.35
2008 $3.16
2007 $2.92
2006 $2.68
2005 $2.41
2004 $2.03

Earnings Per Share – Modern Graham

2014 (estimate) $4.76
2013 $4.44
2012 $4.03
2011 $3.67
2010 $3.33
2009 $3.06

Conclusion:

Walmart Stores is a solid company with a strong history of success; however, when measured using ModernGraham’s requirements for the Defensive Investor or the Enterprising Investor, revised and updated from Benjamin Graham’s The Intelligent Investor, the company does not appear to be a solid opportunity at this time.  The current ratio and the high PB ratio eliminate it from contention for the Defensive Investor, and similarly the high level of current liabilities eliminates it from the Enterprising Investor’s view.  Looking at it purely on a valuation standpoint, the company appears to be fairly valued, as it is currently trading within ModernGraham’s margin of safety.

What do you think?  Is Walmart fairly valued?  Is the company not suitable for Defensive Investors and Enterprising Investors?  Leave a comment or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in Walmart at the time of publication and had no intention of purchasing a position in the next 72 hours.

Photo Credit:  Andrew Magill

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