Invest Walmart Essay

1716 words - 7 pages

Running head: THE VALUATION OF WAL-MART

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THE VALUATION OF WAL-MART

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In fiscal year 2010, Wal-Mart stock sold for a 52-week high of $55.01 and a 52-week low
of $46.42. Stock in the company was regularly recommended as a “buy” or a “hold” by analysts,
according to Bloomberg L. P. However, with dividend payment of only $1.09 per share on
earnings of $3.72, a payout of only 29%, far lower than the industry payout rate at maturity of
45%. The result of this low dividend payout has Sabrina Gupta, a stock analyst, reevaluating the
actual value of Wal-Mart stock as a recommendation to new or existing clients.
Wal-Mart was built to save people money and make their lives ...view middle of the document...

THE VALUATION OF WAL-MART

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Specifically, Ms. Gupta’s analysis should have recommended Wal-Mart as a buy to both holding
and new investors.
A low risk stock that has consistently beat the market, Wal-Mart stock offers investors
the opportunity to profit from its growth and expansion. The fundamental health of stock is
determined by looking at revenue, earnings per share (EPS), and return on equity (ROE). See
Table 1. Comparing annual totals for the three years preceding Ms. Gupta’s analysis, Wal-Mart
receives a PASS for revenue because of its consistent increasing revenue from 2008-2010.
Increasing revenue shows consistent company growth, which is a good sign for the company and
its investors.
Second, comparing EPS for the same period also shows an increasing amount of revenue
is flowing back into the shareholder’s pockets. The EPS increased 20% over the three years of
Ms. Gupta’s analysis. Walmart also receives a PASS for EPS. Finally, the ROE shows company
efficiency, indicating very similar numbers from 2008-2010 at ~20%. Although the company
and its investors would prefer an increasing ROE, a stable one shows that management is
producing consistent returns for the owners of the company. Wal-Mart receives a PASS for
ROE.
Table 1
Wal-Mart Financial Information

2010

2009

2008

408,124m

404,374m

377,023m

EPS

3.72

3.35

3.16

Dividends

1.09

0.95

0.88

Revenue

THE VALUATION OF WAL-MART
ROE

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21.08

20.63

20.18

(Zahedi, 2011)
Wal-Mart’s historical data, between 2008 and 2010, shows the company is healthy and
growing. After looking at the health, Ms. Gupta should have looked at other professional
opinions for the stock during her analysis period. Out of 27 analysts, more than half of them
recommended Wal-Mart stock as a buy or strong buy, and only one indicated selling the stock.
See figure 1.

Figure 1. Recommendation for Wal-Mart Stock in 2010. (NASDAQ, 2014)

Next analysis should look for a stock’s chances at positive earnings surprises.
Unfortunately, this is where short-term or low volume investors would not win anything but
impatience. Although, the stock did not lose any value per share it also did not gain. Despite
forecasting for positive earnings, the stock did not make any positive gains in 2010. The stock
opened near $54 and closed at the nearly same price. Its earnings surprise results does give the

THE VALUATION OF WAL-MART

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stock a FAIL because of its erratic earnings surprises in 2010. It did however; beat its market
estimate by $1.12 per share (Walmart, 2010).
Similarly, when you look at Wal-Mart’s earnings forecast for 2008-2010, you can see that
it failed to meet its forecasts, and its EPS dropped from $3.20 to $.99 during that period, with a
significant drop particularly in 2010. Its valuation scores a FAIL for its performance in 2010. As
unexpected as this drop in earnings was, the overall stock serves long-term...

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