Monday, January 21, 2008

* Stock Analysis: WMT Wal-Mart

Linked here is a PDF copy of my analysis of Wal-Mart Stores, Inc. (WMT) (alt.1, alt.2). Below are some highlights from the above linked analysis:

Company Description: Wal-Mart Stores, Inc. operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price and 4.) Graham Number. WMT is trading at a discount to 3 of the 4 valuations listed above - all but 4.) Graham Number. If I exclude the high and low valuation, and average the remaining two valuations, WMT is trading at an astounding 10.8% discount. WMT gets a Star for being fairly valued.

Dividend Analytical Data: In this section I consider five factors, see page 2 of the linked PDF for a detailed description: 1.) Rolling 4-yr Div. > 15%, 2.) Dividend Growth Rate, 3.) Years of Div. Growth, 4.) 1-Yr. > 5-Yr Growth and 5.) Payout 15% of avg. WMT earned 3 of the 4 available Stars, missing out only on 1.) Rolling 4-yr Div. > 15% above.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description: 1.) NPV MMA Diff. and 2.) Years to >MMA. WMT earned a star for 1.) above. Given its current yield and calculated dividend growth rate, the 1.) NPV MMA Diff. is an impressive $15,814 per $1,000 invested.

Other: For decades WMT has been a retail juggernaut. Mowing down prices and the competition in one swoop. Double-digit sales and earnings growth have been the norm.

Conclusion: WMT earned one Star in the Fair Value section, a three Stars in the Dividend Analytical Data section and one Star in the Dividend Income vs. MMA section for a total of Five Stars, which rates it as a 5-Star Strong Buy. I cautiously continue to add to my WMT position.

WMT has become so large that double-digit growth going forward will be difficult for them to sustain. WMT must maintain a 14.3% average dividend increase to maintain an acceptable NPV MMA Diff. When I lower the EPS growth rate to 13% and the dividend growth rate to 14.3%, WMT's DCF value drops to $43.45, which would mean it is trading at a 8.7% premium. WMT's long-term earnings growth will have to be driven by international expansion. I will be watching closely WMT's annual dividend increase likely to be announced in early March.
Disclaimer: As always this is only my opinion and you should not rely on it. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I own shares of WMT.

What are your thoughts on WMT?

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