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Wal-Mart (NYSE:WMT) is a global retail chain, the stock is extremely undervalued going into 2013. Investors should anticipate a rapid recovery in valuation based on growth, cost control, and improving investor sentiment.

Qualitative Analysis

Source: Information pertaining to Wal-Mart came from the shareholder annual report and shareholder quarterly report

Wal-Mart operates a retail concept called: Everyday low prices (EDLP), it's in its radio, television, internet ads, and it is probably one of the world's most recognizable ad-slogans of all time. The business concept is simple, Wal-Mart sells products at a consistently low price, and gains market share from competitors gradually. Wal-Mart is so good at EDLP that it has closed millions of small businesses. Wal-Mart is extremely price-competitive, and is able to compete and steal market share in emerging markets as well.

(click to enlarge)
Wal-Mart's fastest growing divisions are Wal-Mart International, and Sam's Club. The wholesale division (Sam's Club) continues to grow because of its ultra-low-price philosophy. Wal-Mart international is where Wal-Mart is investing a lot of its cash flow, and is its fastest growing division.
(click to enlarge)Wal-Mart depreciates property and equipment at a slower rate than when it acquires the assets. In 2012 9-months ended Wal-Mart recorded $6.3 billion in depreciation and amortization. The company invested $8.29 billion in property and equipment. The company contributed $2 billion to its shareholder equity by being able to invest into property at a rate faster than it records depreciation. This shows that the company is capable of improving shareholder equity, and that the company is effective at managing its capital expenditures.

(click to enlarge)During 2011 Wal-Mart was able to open/add 1,094 stores (which is why the net-cash used on investing activities increased substantially in 2011 then declined in 2012 (acquisitions worth $3.5 billion in 2011).

Wal-Mart remains a compelling investment opportunity: due to year over year sales growth in its international business division, effective cost management, and improving global economic outlook.

Wal-Mart competes for market share with Amazon (NASDAQ:AMZN), Macy's (NYSE:M), Costco (NASDAQ:COST), Sears Holding (NASDAQ:SHLD), Target (NYSE:TGT), Dollar General (NYSE:DG), Family Dollar Stores (NYSE:FDO), among many others.

Technical Analysis

Wal-Mart has been on a continuous down-trend since September 2012. I do not anticipate this down-trend to continue. Rather I anticipate a reversal in the price of the stock, and a break above the symmetrical triangle formation within January.

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Source: Chart from freestockcharts.com

The stock is trading above the 200-Day Moving Average, while trading below the 20-, 50-Day Moving Average. The stock currently traded in a tight channel, with the moving averages giving a mixed indication of where the stock price is likely to go. I anticipate the stock to break above the upper-trend-line due to my price forecast (more detail in the forecast section of the article). The technical analysis supports the buy-thesis on the stock.

Notable support is $57.50, $62.40, and $67.20 per share. Notable resistance is $72.50, $75.60, and $78.00 per share.

Street Assessment

Analysts on a consensus basis have reasonable expectations for the company going forward.

Growth Est

WMT

Industry

Sector

S&P 500

Current Qtr.

9.00%

43.00%

9.50%

9.30%

Next Qtr.

9.20%

54.80%

29.90%

14.60%

This Year

9.60%

14.60%

31.60%

7.10%

Next Year

9.30%

16.90%

-15.50%

12.90%

Past 5 Years (per annum)

8.70%

N/A

N/A

N/A

Next 5 Years (per annum)

9.20%

11.78%

14.17%

9.10%

Price/Earnings (avg. for comparison categories)

13.9

-45.03

-1.29

12.72

PEG Ratio (avg. for comparison categories)

1.51

-1.04

0.46

1.32

Source: Table and data from Yahoo Finance

The company shows reasonable growth as analysts on a consensus basis have a 5-year average growth rate forecast of 9.2% (based on the above table).

Earnings History

12-Jan

12-Apr

12-Jul

12-Oct

EPS Est

1.46

1.04

1.17

1.07

EPS Actual

1.44

1.09

1.18

1.08

Difference

-0.02

0.05

0.01

0.01

Surprise %

-1.40%

4.80%

0.90%

0.90%

Source: Table and data from Yahoo Finance

The average surprise percentage is 1.3% above analyst forecast earnings over the past four quarters (based on the above table).

Forecast and History

Year

Basic EPS

P/E Multiple

2004

$ 2.08

25.89

2005

$ 2.41

21.74

2006

$ 2.68

17.21

2007

$ 2.71

17.60

2008

$ 3.13

16.21

2009

$ 3.40

16.8

2010

$ 3.71

14.43

2011

$ 4.47

12.54

2012

$ 4.52

13.68

2013

$ 4.92

13.94

Source: Table created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

The EPS figure shows that throughout the 2004-2013 the company was able to improve earnings. The consistent earnings growth is because of its unique business strategy, and its ability to expand into foreign markets.

(click to enlarge)

Source: Table created by Alex Cho, data from shareholder annual report

By observing the chart we can conclude that the business is non-cyclical. The largest risk factor to Wal-Mart is competition and regulatory forces. These risks are miniscule, therefore I have to remain optimistic on the company. I have built a forecast around these positive growth factors (table below).

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Source: Forecast and table by Alex Cho

By 2018 I anticipate the company to generate $8.40 in earnings per share. This is because of earnings growth, international expansion, improving global outlook, and cost management.

The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.

(click to enlarge)

Source: Forecast and chart by Alex Cho

Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on January 31st of each year.

(click to enlarge)

Source: Forecast and chart created by Alex Cho, data from shareholder annual report, and price history is from Yahoo Finance.

Investment Strategy

WMT currently trades at $68.59. I have a price forecast of $91.41 for January 31st 2014. The stock is below value, and I anticipate a recovery in value throughout 2013.

Short Term

Over the next twenty-four months, the stock is likely to appreciate from $68.59 to $91.41 per share. This implies 33.27% upside from current levels. The technical analysis indicates the beginning stages of an up-trend, further backing the buy-thesis on the stock.

Investors should buy WMT at $68.59 and sell at $91.41 to pocket short-term gains of 33.27% in 2014-2015.

Long Term

The company is a great investment for the long-term. I anticipate WMT to deliver upon the price and earnings forecast despite the risk factors (competition and regulation). Wal-Mart's primary upside catalyst is international expansion, rising incomes of the middle class, and cost management. I anticipate the company to deliver upon my forecasted price target of $142.72 by 2018. This implies a return of 108% by 2018. When factoring back in the dividends (based on the table below) the company will generate a combined return of 129.28%. This rate of return is exceptional considering the low-level of risk (5-year beta of 0.4).

Year

Dividend Yield @ $68.59 per share

Cumulative Total

2013

2.32

2.32

2014

2.71

5.03

2015

3.17

8.20

2016

3.70

11.90

2017

4.33

16.23

2018

5.06

21.28

Source: Forecast and table by Alex Cho, dividend data from shareholder annual report

A higher yielding investment opportunity albeit having higher risk is to buy the Jan 17, 2015 calls at the $70.00 strike. The call premiums trade for $5.40. The price forecast for the beginning of 2015 is $99.93. The rate of return if the calls expire at $99.93 is 454%. The break-even point is $75.40.

WMT has a market capitalization of $229.4 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity.

Conclusion

Wal-Mart manages capital extremely well, the business model works, Wal-Mart continues to grow earnings, and it also pays a dividend. This company is an exceptional investment, or what others call a cash-cow.

The conclusion remains simple: buy Wal-Mart.

Source: Wal-Mart The Cash-Cow Of 2013