Instructor: Dr. Eric Fricke
Name(s): Hong Le
Kim Loan Vu
Valuing Wal-Mart 2010
1. What would be your investment recommendation on a scale of 1 to 5 with 1 = strong sell, 2 = sell, 3 = hold, 4 = buy, and 5 = strong buy. Our investment recommendation is 4 = buy because price to book value for Wal-Mart has a lowering trend, which seems to show that it is becoming a safer and a more stable stock to invest in. The Dividend yield for Wal-Mart is lower than the industry average, signifying that Wal-Mart is using its cash revenue to reinvest in the company. Wal-Mart is still viewed as an expanding company because of their huge expansion plans for the upcoming years. Compared to its competition it has a more robust operating foundation because of the management systems they have applied. This has helped to create extraordinary turnovers for receivables, inventory, and assets. All these factors have supported Wal-Mart stock being a good buy.
2. Describe the role of an equity analyst.
The role of an equity analyst is to analyze financial data and trends of a company. The analyst has to response for the company investment potential by predicting the environment of market in order to buy, sell, or hold its shares. An equity analyst may also have to pay attention to everything that may have impact on business’ finances as well as analyze the budget and come up with a plan to get out of debt. For example, analysts believe that Wal-Mart will continue to increase profits because its annual earnings growth forecast of 10.40 per cent for the next five years. As a result, many analysts recommend to buy more shares of Wal-Mart in the year of 2010. In the case of Wal-Mart, there are three methods for analysts to determine the value of the company. The first one is called the dividend discount model which is determined the current stock price of the company representing the present value of the future dividends. It is difficult to use this way to predict the future dividends because shares are valued by forecasting dividends in perpetuity. The second method is called Capital Assent Pricing Model which using to determine the equity discount rate for Wal-Mart in order to find out the expected return. The last method is called price/earnings multiple approach for investors to compare the value of stock. To illustrate, Wal-Mart traded at trailing P/E ratio of 14.7 times in the year of 2010 and estimate a forward P/E ratio is 13.4 times. An analyst can use this information to determine current price or future. After all, the role of an equity analyst is to pay attention to the trend of the company’s finances in order to avoid of being in debt.
3. In what lifecycle stage would classify Wal-Mart.
Future years, the dividends are summed and the total is discounted back to its present value. In order to determine dividends to infinity, the constant growth model is used and these are discounted back to present value as well. Then the two numbers are added together. Wal-Mart has a projected growth rate in dividends for the next five years, but they do not project indefinite growth in dividends. So, for the purpose of this valuation technique we used the projected 12% growth rate in dividends for the next five years and an 8% growth rate there after. It is assumed that Wal-Mart’s growth will slow down because they are entering the maturity stage of the industry life cycle. They operate in almost every state and several countries, so there are not nearly as many expansion opportunities as there once were.
4. How has Wal-Mart been able to grow faster than its US competition? Wal-Mart been able to grow faster than its US competition by it's "good concept" involved huge stores offering customers a wide variety of name-brand goods at deep discounts that were part of an "everyday low prices"...