Firm Introduction Wal-Mart stores incorporation is a retail and wholesale business headquartered in the Bentonville AR in the United States. The firm runs its operation through three business segment. These are the Wal-Mart international, Sam’s club and Wal-Mart U.S. The latter segment runs a retail digital and physical store locally.
Wal-Mart also offers a list of financial services in its US segment such as money orders, wire transfers, check cashing and payments of bills. Wal-Mart international on the other hand operates retail and wholesale as well as other business formats abroad. The categories of this segment include warehouse clubs, hypermarkets, supermarkets, supercenters, home improvement retail among others. Finally, Sam’s club segment has samclubs.com and membership-only warehouse whereby specialty services such as optical, pharmacies, hearing aid centers.
The company ownership is through individual stakeholders, institutional stakeholders and mutual funds owners with each owning 51.92%, 16.62%, and 14.01% respectively. Despite the dominance of the market by the online retail shops such as Amazon, Wal-Mart has found a way to keep their sales soaring. In the last ended fiscal year ending in January 2017, the company registered a growth in sales and returns (“Wal-Mart Company Profile – Cnnmoney.Com”). Analysis of BetaThe Company Beta tells the Wal-Mart company volatility in relation to the retail market.
The market normally has a beta of 1.0. We, therefore, measure how the company beta deviates from the market beta. Wal-Mart beta is 0.07. Since the Wal-Mart stock is below 1.0, and then it moves slower than the market thus it is a low-risk stock. However, such low risks stocks have a lower return.
Cost of Equity The company’s cost of equity is also referred to as the risk-free rate. Using the 10 year Treasury note we can calculate the risk return. We use the beta to calculate Wal-Mart cost of equity as at 30th December of 2016. The cost of equity measures the required rate of returns on an equity investment. It is calculated using the formula:. This shows that investing in a Wal-Mart equity has 2.
87% rate of return. A 2.87% cost of equity implies that the company equity has a considerably favorable returns to its investors. We, therefore, calculate the Wal-Mart’s equity market value in December 2016.
Wal-Mart’s common shares outstanding are 299,000,000. On the closing day of 2016, their stock sold at a closing price of $ 65.4. We multiply the number of stocks by the market value of the stock whereby: Total market value of equity= 19000000*65.
4=19,554, 600,000.00 Wal-Mart Capital Structure The capital structure of Wal-Mart firm involves both equity capital and debt capital. Equity capital is generated through company stock issuance, while debt capital is from bonds, loans, among others that shall be compensated with interest rather than a claim of company profits.
In the closing day of 2016, the total stockholder equity was at $ 6280000 while the debt capital was at $ 13031000. The debt to equity ratio of the company is therefore 2.075. Weighted Average Cost of CapitalIt is the firm’s cost of capital. It measures how much the company shall pay its shareholders to finance their assets. The company WACC is at 2.
71% which is an indication that the company is raising higher returns on investment than the cost of raising capital for the investment. Interpreting Sales and Sales Ratios This year, Wal-Mart registered a 0.09% increase in sales from $3389200 in the year 2016 to $ 361338568.4 in the year 2017.
The forecast growth in sales is 0.04 in 2018, 1nd 0.02% in the year 2019. The company free cash flow measures how the company is performing financially, the current FCF for Wal-Mart is 5.0%. This shows revenue growth into the next year is expected to grow by 5.0%.
Justify The FCF On Jan 31st 2016, our stock’s free cash flow is reported at $20.065 million. On Jan 31st 2017, the free cash flow is reported at $25.224 million.
Our projected free cash flow for 2018 stands at $15.922 million. And free cash flow rate of $15 million remains relatively the same for projected years 2019 and 2020. From the data, we can obviously see an increase of $5.2 million in free cash flow between 2016 and 2017, but then, a sudden decrease of roughly $10 million in the next year.
In the excel file, free cash flow is calculated from 3 main elements: EBIT, Change in Net Operating Working Capital between this year and previous year, and Capital Expenditure – Depreciation. In the year 2015 and 2016, net operating working capital rates are positive as a result of Operating Current Assets being higher than Operating Current Liabilities. In 2017 and so on, the Operating Current Assets repeatedly lower than Operating Current Liabilities. This results in very negative Net Operating Working Capital.
But this does not explain why the Free Cash Flow is higher; it is the change between Net Operating Working Capital. In 2017, the changes in Net Operating Working Capital and Capital Expenditure/Depreciation are significantly lower. These two elements combine with the already negative Net Working Capital lead to a free cash flow of $25.224 million. In our project Free Cash Flow from 2018 to 2020, the Free Cash Flow shows significant reduction to $15.922 million, a drop of almost $10 million dollar compared to 2017.
The main reason is due to the much lower change in Change of Net Operating Working Capital. The data remains negative but significantly lower. We believe the Wal-Mart Stores Inc. is cutting down investment for the companies in the following years; that is the reason why we are seeing a reduced in Net Working Capital.
We consider those investment being cut to be factories, human resources, technologies, etc. Analyze Net New Financing The net new financing forecasted data for years 2018, 2019 and 2020 are relatively the same in the number range. The forecasted net new financing is calculated from the forecasted asset and claims data. For each year, our method for financing is through reducing the Long Term Debt.
The Long Term Debts are reduced through 4 passes in projected years 2018 and 2019. The debts are dramatically reduced from the average of $1,450,000 on the 1st pass to around $12.75 on the last pass.
Furthermore, these debt reductions also reduce the amount of interest being paid. The average interest expenses on the 1st pass for year 2018 and 2019 are roughly $503,000 and $4.42 on the last pass. Analyze Intrinsic Value and Stock Price Our WACC is calculated at 2.
87%. If we input the WACC or any percentage value within (-0.07) of WACC, we achieve very large Enterprise Value of 315,447,543,395.35 and a large Intrinsic Value per share of $1,055.01. Therefore, we choose to input a growth FCF rate of 2.70% and achieve an Enterprise Value of $9,075,618,114.85, and an intrinsic price per share of $30.
22. We believe our calculation for the stock is undervalue. Because, our calculated intrinsic value per share of $30.22 is lower than the actual stock price in 2016: $65.4. Scenario analysis based on different FCF growth ratesAs the average growth rate of FCF increases, intrinsic value of equity also increases accordingly. Intrinsic value of stock per shares also increases at a fairly steady amount until average growth rate of FCF reaches 2.
50%, that when it’s more than doubles the amount it was when the average growth rate of FCF was at 2%. As the datas present, Walmart’s stock was overvalued.Equity value estimations based on multiplesThe industry enterprise value/ EBIT multiple is 20.91. Based on that, we were able to estimate the total enterprise value to $478,086,240. Since the intrinsic value of equity is equal to Enterprise value plus cash and cash equivalent minus short/ current long term debt minus long term debt, we were able to come up with $439,015, 240 as the intrinsic value of equity. The average growth rate of FCF came out to be 1% and Intrinsic value of stock per share is $1.47.
Base on this multiple analysis, we came to the conclusion that Walmart’s stock was overvalued.Provide a short executive suggestion on how the firm can increase its equity value in the future, from improving its capital structure, dividend policy, governance, etc.Walmart is doing well as a company, and even though Walmart is a large corporation it is important to keep its board members smaller to size.
Smaller boards seem to work better than a large board with many members. More team members can mean more ideas but also more conflicts as different personalities may clash. Smaller groups can communicate much better and all good ideas may be heard instead of being overshadowed. In order to have more effective employees, Walmart should offer stock options to its employees, which can act as an incentive for more attentive work since an employee’s salary is now linked to how well the company is doing. It would also be smart to keep shareholders happy since they are a part of the company, no matter how small their shares may be. Protect shareholders’ rights so they are more inclined to stay and listen to their ideas and opinions can be helpful.
Happy employees lead to better result, which can lead to more profit for Walmart.