Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Companies Benjamin Graham Would Invest In Today – March 2016. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how Wal-Mart Stores Inc (WMT) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Wal-Mart Stores, Inc. is engaged in the operation of retail, wholesale and other units in various formats around the world. The Company offers an assortment of merchandise and services at everyday low prices (EDLP). The Company’s operations are conducted in three segments: Walmart U.S., Walmart International and Sam’s Club. The Walmart U.S. segment operates retail stores in all 50 states in the United States, Washington D.C. and Puerto Rico, with three primary store formats, as well as digital retail. The Walmart International segment consists of operations in 26 countries outside of the United States and includes numerous formats divided into three main categories: retail, wholesale and other. The Sam’s Club consists of membership-only warehouse clubs and operates in 48 states in the United States and in Puerto Rico, as well as digital retail.
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Downloadable PDF version of this valuation:
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
|Defensive Investor; must pass 6 out of the following 7 tests.|
|1. Adequate Size of the Enterprise||Market Cap > $2Bil||$195,420,402,125||Pass|
|2. Sufficiently Strong Financial Condition||Current Ratio > 2||0.93||Fail|
|3. Earnings Stability||Positive EPS for 10 years prior||Pass|
|4. Dividend Record||Dividend Payments for 10 years prior||Pass|
|5. Earnings Growth||Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end||32.68%||Fail|
|6. Moderate PEmg Ratio||PEmg < 20||13.95||Pass|
|7. Moderate Price to Assets||PB Ratio < 2.5 OR PB*PEmg < 50||2.52||Pass|
|Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.|
|1. Sufficiently Strong Financial Condition||Current Ratio > 1.5||0.93||Fail|
|2. Sufficiently Strong Financial Condition||Debt to NCA < 1.1||-10.05||Fail|
|3. Earnings Stability||Positive EPS for 5 years prior||Pass|
|4. Dividend Record||Currently Pays Dividend||Pass|
|5. Earnings Growth||EPSmg greater than 5 years ago||Pass|
Stage 2: Determination of Intrinsic Value
|MG Growth Estimate||0.12%|
|MG Value based on 3% Growth||$65.65|
|MG Value based on 0% Growth||$38.48|
|Market Implied Growth Rate||2.72%|
|% of Intrinsic Value||159.64%|
Wal-Mart Stores, Inc. does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $4.49 in 2013 to an estimated $4.53 for 2017. This level of demonstrated earnings growth does not support the market’s implied estimate of 2.72% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on Benjamin Graham’s formula, returns an estimate of intrinsic value below the price.
Wal-Mart Stores, Inc. receives an average overall rating in the ModernGraham grading system, scoring a C.
Stage 3: Information for Further Research
|Net Current Asset Value (NCAV)||-$18.28|
|Number of Consecutive Years of Dividend Growth||20|
|ModernGraham tagged articles||Morningstar|
|Google Finance||MSN Money|
|Yahoo Finance||Seeking Alpha|
Most Recent Balance Sheet Figures
|Balance Sheet Information||1/1/2016|
|Total Current Assets||$60,239,000,000|
|Total Current Liabilities||$64,619,000,000|
|Shares Outstanding (Diluted Average)||3,217,000,000|
Earnings Per Share History
|Next Fiscal Year Estimate||$3.94|
Earnings Per Share – ModernGraham History
|Next Fiscal Year Estimate||$4.53|
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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. See my current holdings here. This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions. ModernGraham is not affiliated with the company in any manner. Please be sure to review our detailed disclaimer.