Why I previously bought Wal-Mart (WMT) (6/12/2015)


Why I previously bought Wal-Mart (WMT)  (6/12/2015)

  1. Good fundamentals
  2. Good stewardship and moat
  3. Undervalued


Good fundamentals

WMT has demonstrated stability with its fundamentals. From 2005-2014 here are the compounded annual growth rate (CAGR) data that will support its steadiness:

  • Revenue has CAGR of 4.68%
  • EPS has CAGR of 7.29%
  • Dividend has CAGR of 13.796%
  • Book Value CAGR of 7.93%

In addition, WMT has decreased (insignificantly) its 2005 DE ratio of 0.57 into 0.54 during 2014.WMT does not have all of its numbers in positive CAGR. Some of its declining, but acceptable numbers from 2005-2014 are as follows:

  • Operating Margin CAGR declined -0.58%
  • Return on Invested Capital CAGR declined -0.37%
  • Return of Equity CAGR declined -0.59%

Despite this decline in Operating Margin, WMT has maintained an operating margin of >20 from 2005-2014.

This company resembles what Peter Lynch classifies as a stalwart. A stalwart has a large capitalization that provides investors with slow but steady and dependable growth prospects (Investopedia, n.d.).


Good stewardship and moat

Morningstar gave WMT a Standard for its stewardship rating on 4/30/2015. Walton Enterprises is the largest shareholder of WMT, Walton Enterprises (Walton family members) owns about 48.9% outstanding shares. The everyday low price (EDLP) proposition has been effective for the company throughout the years (see Revenue CAGR). WMT’s EDLP strategy has been in existence for over half a century ago and it has been a success for the company (Business Insider, 2012).

The new CEO, as of February 1, 2015, Doug McMillon is very aware of the company’s strengths and weaknesses. He seems determined to work harder on the company’s weaknesses. EDLP finds its origins from the benefits of WMT’s everyday low cost (EDLC) among WMT’s suppliers. WMT is pushing for its suppliers to find the lowest cost possible to bring out their quality products (Ziobro, 2015). EDLC means better EDLP offers which results into more sales. According to Greg Foran (CEO of WMT U.S.), EDLC has seen improvements this 2015. As an example, WMT was able to raise orders for an item to 13 million from 6 million by cuttings its price from $2.68 to $1.68 (Souza, 2015).

Same store sales for WMT have been on a slump since July 2009 (Morningstar). CEO McMillon appears to be very determined in addressing this weakness. According to a Ziobro (2015), “We want to get back to a point where we are playing offense with price because of the way we go to market–Our pricing strategy is aimed at one objective, and that is building trust.”

Although there is an ongoing tug of war between WMT and its suppliers, it appears that suppliers understands well the concept of applying the low cost model on their businesses from top to bottom (such as lowering marketing budgets, etc.; Ziobro, 2015).

“They (WMT) kept pushing, ‘We’re going back to basics, it’s all about low pricing.’’

—A supplier who attended February meeting

An old article by Riper (2007) stated that the more business a supplier does with WMT, the lower its margins becomes. However, WMT is still able to generate CAGR in revenue of 3.98% from 2007 to 2014.



The company is undervalued as of the moment. The company’s current (6/12/2015) market capitalization is $233 Billion while its revenue is roughly around $485 Billion. This WMT current valuation represents 48% of its total revenue. In contrast with Costco Wholesale Corp (COST), COST has current market capitalization of $61 Billion while its revenue runs $115 Billion; which represents 53% of its total revenue. Comparing WMT with Target Corp (TGT), TGT has $50 Billion market capitalization with $73 Billion total revenue. TGT has a current valuation of 72.60% versus its total revenue.

The company has a PE ratio of 14.9, which is five percent lower than its 11-year PE average of 15.54.


Morningstar as of 5/27/2015: $81 USD/share

Value Line’s 2018-2020 price projection: $100 USD/share (LOW) to $120 USD/share (HIGH)

PE, PBV, PS (10 year average): $78.78 USD/share

Hagstrom five-year DCF: $108.12 USD/share

Hagstrom ten-year DCF: $157.67 USD/share

My own valuation: $100.95 USD/share; 39% upside from current price of $72.43



Investopedia. (n.d.). Stalwart. Retrieved fromhttp://www.investopedia.com/terms/s/stalwart.asp

Business Insider. (2012). Why Walmart Can Pull Off ‘Everyday Low Prices’ But Everyone Else Keeps Failing. Retrieved fromhttp://www.businessinsider.com/why-walmart-can-pull-off-everyday-low-prices-while-everyone-else-keeps-failing-2012-9

Riper, T. (2007). The Wal-Mart Squeeze. Retrieved fromhttp://www.forbes.com/2007/04/23/walmart-suppliers-margins-lead-cx_tvr_0423walmart.html

Souza, K. (2015). Wal-Mart to lean on suppliers for better prices, products, sustainable solutions. Retrieved fromhttp://www.thecitywire.com/node/36438#.VXt3A_lViko

Ziobro, P. (2015). Wal-Mart Ratchets Up Pressure on Suppliers to Cut Prices. Retrieved from http://www.wsj.com/articles/wal-mart-ratchets-up-pressure-on-suppliers-to-cut-prices-1427845404

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