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Wal-Mart (WMT) is the largest retailer in the US and is also gaining ground abroad. The firm has three main units: Wal-Mart US (3,700 stores), Wal-Mart International (4,100 stores) and Sam’s club (600 stores).

I added Wal-Mart to my idea pipeline after having read an article on “Buffett stocks” also owned by the Gates Foundation. Over the last month, WMT has been trading between $53 and $56. Please refer to the stock review explained post if you have questions on what I look for in this analysis.

  1. Business Performance Risk (+) and intrinsic returns (=)

Metric

Status

FCF / Sales

Last twelve months: 3.5%, higher than historic performance over the last 10 years, usually close to 1%-2%

ROE

LTM: 22.4%, a little over the 5 year average of 20.7% but overall consistent with historical performance clocking between 19% and 22% every year over the last 10 years!

ROA

LTM: 8.5%, in line with the 5 year average of 8.3%

Revenue Growth

While revenue growth over the last 10 years has been 9.5%, I believe recent performance is more relevant, with a 3 year average of 5.4%, in spite of a flat year last year.

Cash distribution to shareholders

WMT pays a 2.2% dividend yield, with a payout ratio of about 30%.

Over the last 5 years the company has bought back ~10% of its outstanding shares.

While WMT’s metrics are slightly below my preferred threshold, I still view the performance as good given the razor-thin margin industry in which WMT operates. ROE is extremely consistent and generally higher than what I would be comfortable with. The question in my mind is around growth which has been really good for the past 10 years but seems to be tapering off. As mentioned I will use a 5% growth rate as a first approximation for our purpose here.

Intrinsic returns for WMT could break down as follows:

  • 2.2% dividend yield, using 30% of earnings
  • ~5% growth estimate, which based on a 25% ROE would use another 15% of earnings
  • We are left with about 45% of earnings which could be used for buybacks. Based on the current earnings yield of 7.5%, WMT could buyback a little more than 3% of its own stocks!

This gives us a total intrinsic of slightly over 10% which is good -- not great, but good.

  1. Balance Sheet Risk (=)

Metric

Status

LT Debt / Equity

0.6x which is slightly higher than the ~0.5x WMT has been at over the last few years

Current Ratio

0.8x, even lower than previous years at 0.9x

Overall, WMT’s balance sheet is ok. It carries a bit of debt but nothing too high for my preference and has an aggressive current ratio… but WMT’s business is in large part to manage its current ratio so I’m not too worried.

  1. Valuation Risk (=)

Metric

Status

Cash Return

6.1%

P/E

13.3x, lower than the S&P at 14.7x and the company’s 5 year average at 16.4x

Current valuations are not too high appear to be reasonable, with a P/E of 13x and a cash return of 6.1%. I doubt at this level I would be able to get a comfortable margin of safety though.

Conclusion

WMT appears to be a great business with strong returns, especially given the industry it plays in. In addition, Management has been returning cash steadily to investors with a 2% dividend yield and 2% share buybacks per year.

However, while current valuation levels seems appropriate they probably don’t leave an investor with a good margin of safety. While I’ll probably do a more in-depth stock analysis at some point in the future, I will not rush into it – but I would be willing to make it more a priority if WMT’s price were to come down to $50.

Disclosure: No position

Source: Wal-Mart Valuation: A Great Business, But Not an 'Everyday Low Price'