Wal-Mart Stock Should Benefit From Lower Spending and More Stores

Sep. 2.10 | About: Wal-Mart Stores, (WMT)

Wal-Mart (NYSE:WMT) is the world’s largest retailer, competing with the likes of Target (NYSE:TGT), Costco (NASDAQ:COST) and Best Buy (NYSE:BBY). The current Trefis stock price estimate for Wal-Mart is $65.42, about 28% higher than the current market price of around $50. Reasons for our bullish outlook include Wal-Mart’s rapid international expansion and a long-term trend of declining capital spending. Our analysis follows below.

Capital Expenditures

We expect Wal-Mart’s capital expenditures to rise from 10.8% of gross profits in 2009 to about 13.4% in 2013. Thereafter we expect capital spending to slide gradually, reaching 11%-11.5% levels by the end of our forecast period.

The short-term spending rise is attributable to Wal-Mart’s rapid international expansion and its Project Impact remodeling program for US stores. Both efforts should be largely completed by 2013, which explains why subsequent capital requirements are likely to come down. Capital spending is also likely to decline because Wal-Mart is in the process of reducing the size of its stores, particularly overseas.

There could be a downside of 7% to 8% to our stock price estimate for Wal-Mart if capital spending were to stay at around 13% of gross profits through the end of our forecast period. You can drag the trend-line in the chart below to create your own capital spending forecast for Wal-Mart and see how it impacts the company’s estimated stock price.

Store Openings

We expect that Wal-Mart US will open an average of 60 new stores per year over the course of our forecast period, reaching a total of about 4130 stores by 2016. We expect Wal-Mart International to add approximately 280 stores each year during our forecast period.

However, there could be a 3.5% downside to our stock price estimate if Wal-Mart’s US expansion slows to 40 new stores a year. Similarly, we would expect a downside of about 7% to our price estimate if international expansion slows to about 200 new stores per year.

You can drag the trend-lines in the charts below to create your own forecasts for Wal-Mart’s U.S. and international store growth, respectively, and see how they impact the company’s estimated stock price.

Disclosure: No position