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Summary

  • My assumptions in the Levered Returns models yield a fair value per share of $85, above its August 7th closing price of $73.93.
  • WMT trades at a significant discount to public peers COST, DG and TGT.
  • Share price trades near its 52 week low, now maybe the time to start buying before WMT’s earnings announcement on August 14th.

Wal-Mart (NYSE:WMT) operates retail stores in various formats under 71 banners around the world, aggregated into three reportable segments: Wal-Mart U.S., Wal-Mart International and Sam's Club. Membership and Other Income is another segment that flows through the company's income statement. Wal-Mart generally provides a broad assortment of quality merchandise and services at everyday low prices. Understanding the company's operating segments sheds light on important growth drivers. Therefore, I've built a revenue forecast on an operating segment basis for the company:

The company's operating segments are as follows (per 10-K):

  1. Wal-Mart U.S. segment (59% of Sales) - The U.S. segment includes the Company's mass merchant concept in the U.S. operating under the "Wal-Mart" brands, as well as walmart.com.
  2. Wal-Mart International (29% or Sales) - The international segment consists of the company's operations in Africa, Argentina, Brazil, Canada, Central America, Chile, China, India, Japan, Mexico, and the United Kingdom.
  3. Sam's Club segment (12% of Sales) - The Sam's Club segment includes the warehouse membership clubs in the U.S., as well as samsclub.com.
  4. Membership and Other Income (1% of Sales) - this segment mostly consists of Sam's Club membership fees, profit sharing arrangements with its credit provider and gains (losses) on asset sales.

DCF Valuation Model

These revenue and profitability growth drivers are reflected below in the Levered Returns discounted cash flow analysis model to determine an Enterprise Value. I then deduct net debt, after-tax underfunded pension obligations, dividends payable and add discontinued net operating assets to conclude the total equity value and resulting per share value for the company:

Other Key Assumptions

Capital Expenditures: I've selected 3.0% of sales which is slightly above what equity research analysts are projecting according to Thomson Reuters.

Working Capital: I've selected -0.4% which equals the average net working capital dollar amounts over the last four quarters as a percentage of sales.

Discount Rate: To estimate the discount rate for Wal-Mart, I used the Levered Returns discount rate model which you can assess below:

Peer Valuation Multiples

Wal-Mart's latest twelve month "LTM" and projected trading multiples are below those of Costco (NASDAQ:COST), Dollar General (NYSE:DG) and Target (NYSE:TGT). This presents an opportunity for value investors when considering Wal-Mart is materially larger and Thomson Reuters median equity analyst growth projections are similar. I fully expect the market to correct this current multiple discrepancy in the long-term.

(click to enlarge)

Conclusion

As the DCF and public company analysis implies, Wal-Mart looks undervalued with a fair market value price target of $85. The company is one of the world's largest firms reporting over $450 billion in annual revenues. However, the market is not giving Wal-Mart its well deserved credit as a global powerhouse while trading at a discount to its public peers. The company has countered the competitive threat from other everyday low price competitors with its Neighborhood Market and Express stores. Wal-Mart remains the retail price leader in food and general merchandise and I expect this to continue for the foreseeable future. As the company trades near its 52 week low, I recommend value investors look into adding WMT to your portfolio at current levels.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: Fundamental Valuation Analysis Shows Wal-Mart Should Trade At $85