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Eric Cota
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I'm a value investor for the long term primarily focused on firms in the S&P 500 that produce solid free cash flow and pay dividends. I look for undervalued firms using a discounted cash flow model. I reinvest dividends and track performance on a total return, risk-adjusted basis. Five years... More
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  • Wal-mart Stores Inc: Cash Flow Valuation Update 3 comments
    Mar 28, 2012 3:34 PM | about stocks: WMT

    Current Price: ~ $61/share
    Projected Yield: ~ 2.60%

    Wal-Mart is the largest retailer in the world with more than $400 billion in annual revenue and fast approaching 10,000 stores across the globe. The company mainly operates supercenters, followed by wholesale warehouse clubs and also is testing a smaller store format for urban areas, which the company has yet to penetrate.

    Estimated WACC for the firm today is 6.09% using the Capital Asset Pricing Model and the company's recent SEC filings.

    Recent free cash flows and noted growth rates:

    Year FCF $Millions
    2003 3177
    2004 5688
    2005 2151
    2006 3070
    2007 4498
    2008 5417
    2009 11648
    2010 14065
    2011 10944
    2012 10745

    Average Annual Growth FCF: ~ 26%

    CAGR FCF: ~ 15%
    Consensus Forecast Industry 5-Year Growth: ~ 14% per year

    Consensus Forecast Company 5-Year Growth: ~ 9% per year

    Internal Growth Rate: ~ 6%

    Sustainable Growth Rate: ~ 18%

    Scenario 1

    • Start at $10745 million FCF
    • Assume a 5-year growth rate in FCF of 9% per year, then no growth or 0% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 10745
    1 11712
    2 12766
    3 13915
    4 15167
    5 16533
    Terminal Value 295841

    The firm's future cash flows, discounted at a WACC of 6.09%, give a present value for the entire firm (Debt + Equity) of $278429 million. If the firm's fair value of debt is estimated at $53043 million, then the fair value of the firm's equity could be $225386 million. $225386 million / 3430 million outstanding shares is approximately $66 per share and a 20% margin of safety is $53/share.

    Scenario 2
    All else being equal,

    • Assume a 5-year growth rate in FCF of 9% per year, then 1% growth in FCF per year forever:

    Discounted Cash Flow Valuation

    Year FCF $Millions
    0 10745
    1 11712
    2 12766
    3 13915
    4 15167
    5 16533
    Terminal Value 353949
    • Present Value of the entire firm (Debt + Equity): $321664 million
    • Value of Equity: $268621 million or $78/share
    • 20% margin of safety is $62/share


    Yahoo! Finance

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Stocks: WMT
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Comments (3)
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  • Charlie Stanton
    , contributor
    Comments (9) | Send Message
    Why do you not use a Free Cash Flow to Equity since that is what you will ultimately pay for? Can you please provide further analysis on your CAPM analysis? What risk free rate did you use and for what date?


    Also, how about just analyzing the dividend paid. Using a simple dividend discount model, the dividend paid for the full year is $1.59. Multiply that by a sustainable growth rate of approximately 3% and you get: $1.64. If you capitalize the $1.64 by a capitalization rate of 3% (Your 6.09% WACC less the 3% sustainable growth rate) you get a stock value of approximately $54. It would be safe to assume this is an acceptable base value for Walmart.
    25 May 2012, 03:54 AM Reply Like
  • Eric Cota
    , contributor
    Comments (22) | Send Message
    Author’s reply » Hi Biz:


    Thank you for the comment. Seems like there's a hundred or more different ways to approach the valuation of a firm by discounting future cash flows. But how do you define cash flows, how much growth is expected, and how do you determine a reasonable discount rate? Here's a link to the kind of analysis I'm attempting:



    I'm trying to determine the present value of the firm's future free cash flows where FCF = Operating Cash Flow - CAPEX. I like this simple definition of FCF; preferring to approach the analysis generally using FCF rather than specifically using Free Cash Flow to Equity or FCFE.


    Regarding CAPM, what risk free rate should you use and what market risk premium? I know there's a lot of controversy surrounding CAPM so I don't know if there are any exact answers to these questions. I use the yield on the U.S. 30-year treasury as a risk free rate and 8% market risk premium; long-term views. The yield on the 30-year treasury on March 28, 2012 was 3.28% so that was my risk free rate.


    I think the Dividend Discount analysis you describe is fine. Your valuation for WMT agrees with my conclusions; that WMT may be a reasonable buy at $53 - $62.


    Thanks again for the comment and please let me know if I can give more info. All the best - Eric
    26 May 2012, 03:36 PM Reply Like
  • Charlie Stanton
    , contributor
    Comments (9) | Send Message
    Thanks for the detailed explanation. Professionally I am a private business appraiser, so I understand that you must make assumptions (i.e. discount rate, FCF) when preparing a valuation. Your assumptions seem pretty sound. Recently I spoke with Zeke Ashton of Centaur Capital Partners and he said that for his analysis he simply uses your same calculation of FCF. I enjoy your analysis and look forward to many more posts.
    27 May 2012, 01:10 AM Reply Like
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