16% Spread As Walmart Inc. Continues Bullish Trend

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Walmart Inc. (WMT) is in the business of operations of retail stores across various countries of the world. The major business segments of the company are: Walmart US segment that operates retail stores in US and Puerto Rico; Walmart International segment that is having retail operations in 26 countries and Sam’s Club segment that is having membership warehouse clubs and online retail operations. The share of these segments in total revenue was 60%, 28% and 12% respectively during the previous year.

See the discounted cash flow valuation on Walmart after the JUMP!

INVESTMENT TRIGGERS

The company enjoys a strong retail brand image across the world. The company has strong balance sheet and positive free cash flows. It has regularly rewarded shareholders through dividends and buybacks. The sales and net income have continuously improved over the last five years. The planned investments on reduction of expenses and improvement of productivity are expected to reduce its operating costs lower by 1 per cent during 2013-17. In order to take advantage of e-commerce opportunity, the company raised its stake to 51% in Chinese e-commerce company Yihaodian in Feb 2012 and introduced a new search engine Polaris in August 2012. The launch of Blue Bird, an alternative to debit and checking accounts by Walmart and American express will help customers of the company in saving costs.

VALUATION

Our DCF valuation model provides intrinsic value of each share of the company at $87.82. This DCF Value is obtained on the basis of DCF stream of $107,432 million and terminal value of $228,699 million. After making adjustments for financial assets, net debt and minority interest (book value) from DCF stream and terminal value, value of equity for the company works out to be $295,214 million. We have used WACC of 5.5% for the purpose of above calculations.

INVESTMENT RISKS

The slowdown in economic and industrial activities may result in lesser demand for the products of the company because of lower disposable income with consumers. The traditional retail business of Walmart is facing increased competition from online shopping and department, variety, dollar and specialty stores.  The pressure on prices in retail is also increasing because of increased use of price comparison facilities, showrooming, by the consumers.