The purpose of this report is to evaluate the stock price of Wal-Mart Stores Inc. (which ticker symbol in NYSE is WMT) by fundamental analysis. According to this analysis, I recommend that Wal-Mart is worth to invest in the long term because of the potential growth of market shares and revenue. Besides, based on P/E method and Gordon model, WMT price is undervalued; therefore, if investors buy the stock, they will get benefit not only in capital gain but also in dividend cash inflow.
II. Introduction of Wal-Mart Stores Inc. (WMT)
Wal-Mart, founded by Sam Walton in 1962, is the world’s largest retailer and public corporation. It operates over 6,500 stores worldwide, employs 1.9 million associates, and serves more than 176 million customers each week around the world. The company offers a broad assortment of quality commodities and services and its purpose is “saving people more money so they can live better.” Wal-Mart owns Wal-Mart Supercenters which are discount and grocery stores, SAM’S Clubs which are membership-only warehouse stores, and Neighborhood Markets which are smaller grocery stores. The company faces many major competitors such as Costco Wholesale, Target, Cost-U-Less, Sears Holding, and Dollar General in the USA and Carrefour which come from France in worldwide. Wal-Mart was listed on the New York Stock Exchange (its ticker symbol is WMT) with an initial stock price of 32.50 per share on August 25, 1972 and distributed its first cash dividend $0.0001 per share on March 13, 1974. Besides, it is included in some index such as Dow Jones Composite, Dow Industrials, S&P 100, S&P 500, and S&P 1500 Super Comp. The company revenue is 378.80 billion and EPS is 3.13 from 2007. (shown in appendix 3) Some analysts think Wal-Mart would continue to successful in increasing profit for two reasons. One was an increase in Supercenters which were projected to grow from about 60 percent of Wal-Mart’s selling space to 75%. It was thought that such a move might allow Wal-Mart to increase its market share relative to supermarkets and department stores. Another growth source was its international divisions, which were expected to grow organically as well as through acquisitions. It was anticipated that international divisions would account for over 25 percent of Wal-Mart’s sales within five years. Therefore, they recommend the target WMT stock price will be $68.0 compared to 53.19, the open price on April 1, 2008. However, others recommend the target price will be 46.0 because the competitive environment is not favorable for Wal-Mart. The different opinions confuse investors; therefore, this report will use brief fundamental analysis including industry and individual assessment to evaluate the stock and then hope to offer some useful information.
III. Required Rate of Return to Value Wal-Mart Stock
Before the fundamental analysis, we need to determine the required rate of return (RRR) for WMT stock because RRR represents a discounted rate for Discounted Cash Flow Model and Dividend Discount Model which models are used to value a company. Due to the fact that every investor has different perception on RRR, we use the equilibrium model to reflect the market RRR. That is said if stock return is less than RRR, the stock does not perform well. The commonly used equilibrium model is Capital Asset Pricing Model (CAPM) which is based on the premise that the only important risk of a firm is systematic risk. CAPM suggests that the return of an asset (Ri) is influenced by the prevailing risk-free rate (Rf), the market retrun (Rm), and the covariance between the Ri and Rm as follows:
Ri = Rf + β(Rm - Rf)
This equation also called security market line (SML). Therefore, to calculate Ri, we need to determine the beta value of Wal-Mart. Beta is the measure of the systematic risk of a security. It reflect the tendency of a security’s returns to respond to swings in the broad market. The most popular and...