With concerns about a double dip dissipating, strong brand names are starting to lose their appeal. As an IR consultant, I expect to see strong gains for small under-followed companies like Zevotek (OTCPK:ZVTK) and Bill the Butcher (OTCQB:BILB), which I see as tremendously overvalued. Meanwhile, I expect lower returns from giants like Walmart (WMT).
In this article, I will run you through my DCF analysis on Walmart and then triangulate the result with an exit multiple calculation and a review of the fundamentals compared to Costco (COST) and Target (TGT). I find little room for downside and room for multiples-driven appreciation. Near-term optimism from signs of a full recovery will make Walmart a stock winner - but this upside is quickly dissipating.
First, let's begin with an assumption about revenues. Walmart finished FY2011 with $447B in revenue, which represented a 6% gain off of the preceding year. Analysts model a 9.1% per annum growth rate over the next few years, and I view this as reasonable given that it is under what is expected for the S&P 500.
Moving onto the cost-side of the equation, there are several items to consider: operating expenses, capital expenditures, and taxes. I expect cost of goods sold to eat 74.8% of revenue versus 19.3% for SG&A and 3% for capex. Taxes are estimated at around 33%.
We then need to subtract out net increases in working capital. I model accounts receivable as 1.2% of revenue, inventories as 11.5% of COGS, prepaid expenses as 3% of SG&A, accounts payable as 8% of OPEX, and accrued expenses as 22% of SG&A.
Taking a perpetual growth rate of 3% and discounting backwards by a WACC of 7% yields a fair value figure of $63.54, implying the market has fully appreciated its value.
All of this falls under the context of strong performance:
[E]very segment of our business is stronger than it was a year ago, and we're in a great position heading into this fiscal year. I'm pleased with Walmart's performance for the fourth quarter and the full year.
From a multiples perspective, the stock appears more attractive. Walmart trades at a respective 13.4x and 11.5x past and forward earnings versus 26.4x and 20.7x for Costco, and 13.6x and 12.1x for Target. Assuming a multiple of 16x and a conservative 2013 EPS of $5.19, the rough intrinsic value of Walmart's stock is $83.04, implying substantial upside.
Target has had similarly strong momentum. Fourth quarter comparable store sales were, however, up only 2.2% - more than 100 basis points below internal expectations. Sales have been picking up since the promotionally-intense holiday season. 4Q EPS was up 8.3% from 2010. Consensus estimates for its EPS are that it will decline by 0.9% to $4.23 in 2012 and then grow by 13.9% and 20.5% in the following two years. Assuming a multiple of 16x and a conservative 2013 EPS of $4.76, the rough intrinsic value of the stock is $76.16.
Costco is, in my view, the riskiest of any of the stocks highlighted herein. Management is aiming for 1K club additions and has a solid balance sheet to finance the growth. However, Deutsche Bank (DB) forecasts free cash flow falling to $1.73B in 2013 - a $200M drop. Assuming that the multiple holds at 20x and a conservative 2012 EPS of $4.33, the rough intrinsic value of the stock is $86.16.
Additional disclosure: We seek IR business from all of the firms in our coverage, but research covered in this note is independent and for prospective clients. The distributor of this research report, Gould Partners, manages Takeover Analyst and is not a licensed investment adviser or broker dealer. Investors are cautioned to perform their own due diligence.