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Valuing Wal Mart

Essay by   •  May 7, 2012  •  Essay  •  413 Words (2 Pages)  •  1,731 Views

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Wal-Mart Stores, Inc., the world's largest retailer, operates more than 8,400 stores worldwide. In 1970, Wal-Mart became a publically traded firm. In 1974, its first cash dividend was $0.05 per share. Since that time, the company has undergone eleven two-for-one stock splits. Analysts consistently agree and forecast annual earnings growth of 10.4% for the next five years. Wal-Mart shares currently exceed the buy/hold/sell mix on the Standard and Poor 500 firms, as well as among the supercenters sub-industry. Sabrina Gupta, a financial advisor from a major brokerage firm explored and investigated the financial valuation of Wal-Mart's stock price. Review of financial conditions and risk assessments is required in order for Sabrina to make thorough and accurate recommendations to her clients. Careful examination of valuation of a stock using variants of the perpetual growth model, dividend discount model (DDM), the capital asset pricing model (CAPM); and price/earnings (P/E) multiple are necessary to ensure precise and favorable information to build a diverse portfolio. Analyzing the four models/methods with the intent to gain a better understanding of Wal-Mart's true stock price is important for providing sound financial advice. Each valuation method results in a varying Wal-Mart stock price. We will discuss each model used, and discuss the logic behind the one we feel best represents the true valuation of Wal-Mart's stock.

First, we evaluated Wal-Mart on the perpetual growth in dividends model. With this model we used a growth rate of 14.2 percent, which is based upon Return on Equity multiplied by the plowback for Wal-Mart in the prior period. In reviewing the Wal-Mart numbers we believe this rate of growth is not sustainable in perpetuity for Wal-Mart. When we used the perpetual growth in dividends method, with the high growth rate, the stock price actually went negative. This was because our 14.2 percent growth was larger than our 6.99 percent required rate of return. (We'll provide more on this shortly.) With this being said, for the perpetual growth rate, we decided to use a more sustainable growth rate of 5.0 percent. We feel the 5.0 percent growth rate is realistic due to: industry growth, analyst observations, and the relative size of Wal-Mart compared to competitors. Using 5%, we came up with an estimated stock value of $57.57 per share. The perpetual growth model is not the best measurements for Wal-Mart's stocks as it does not take in to account the next five years growth of 10.4 percent.

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