Higher U.S. Margins and Wal-Mart's Stock Price

Jul.30.10 | About: Wal-Mart Stores, (WMT)

Wal-Mart (NYSE:WMT), which competes with Costco (NASDAQ:COST), Target (NYSE:TGT) and Best Buy (NYSE:BBY), is by far the largest retailer in the world with more than $400 billion in store revenues as of 2009. We currently have a Trefis price estimate of $65 for Wal-Mart’s stock, about 27% above the current market price of around $51.

Trefis members have created forecasts for two key drivers of Wal-Mart’s stock over the last week: (1) Wal-Mart US Gross Profit Margin and (2) Revenue per Square Foot. The members forecast suggest that Wal-Mart US Gross Profit Margin will trend higher than the Trefis forecast, while Revenue per Square Foot will be in-line. These projections indicate a combined upside of around 14% for Wal-Mart’s stock.

We estimate that Wal-Mart US constitutes around 62% of the $65 Trefis price estimate for Wal-Mart’s stock. Hence the stock is quite sensitive to (1) Wal-Mart US Gross Profit Margin and (2) Revenue per Square Foot. Below are charts showing recent estimates created by Trefis members for the two drivers in detail.

1. Wal-Mart US Gross Profit Margin

The average of forecasts for Wal-Mart US Gross Profit Margin created by Trefis members indicated a projected increase from close to 30% in 2010 to around 33% by the end of the Trefis forecast period, compared to the flat Trefis estimate of around 27.5% from 2010 to 2016. The member estimates imply an upside of 13% to the Trefis price estimate for Wal-Mart’s stock. In the past, Wal-Mart US Gross Profit Margin has increased from 26% in 2006 to 27.5% in 2009.

You can drag the forecast trend-line above to express your own view, and see the sensitivity of Wal-Mart’s stock to Wal-Mart US Gross Profit Margin.

2. Revenue per Square Foot

The average of forecasts for Revenue per Square Foot created by Trefis members indicated a projected decrease from around $382 in 2010 to $376 by the end of the Trefis forecast period, compared to the baseline Trefis estimate of a decrease from around $380 in 2010 to around $369 by the end of the Trefis forecast period. The member estimates imply an upside of 1% to the Trefis price estimate for Wal-Mart’s stock. In the past, Revenue per Square Foot has decreased from $411 in 2006 to around $384 in 2009.

You can drag the forecast trend-line above to express your own view, and see the sensitivity of Wal-Mart’s stock to Revenue per Square Foot.

Disclosure: No positions