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    Thursday, May 12, 2005


    Back of the envelope valuation of Walmart (WMT)

    I heard and read a few articles about how Walmart might be undervalued. I decided to take a quick shot at valuing them quickly. I used a dividend discount model because this is by far the strictest model and provides the most likelihood of actually making money.

    I Assumed 10 years of 11% dividend growth (the 3 year average growth rate over the last 10 years) and then GDP level dividend growth from there on. Once the model switched to GDP sized growth, I assumed that the payout rate (amount of earnings paid out as dividends) went to 75% from about 24% on average today. Once Walmart stops growing and just becomes a cash cow, this is a reasonable assumption.

    Using a 10%/9% discount rate growth/terminal phases Walmart is valued at around $66. With a current price of $49 that has a 35% upside. Of course Walmart may well do better than capping out their growth in 10 years (considering that about 2bn new consumers have to enter the middle classes over the next 20-40 years).

    The reason that this is so incredible is that Walmart is such a large and well followed company (though boring). It is an excellent candidate for purchases by very large funds (like Berkshire Hathaway, BRK.a) because they can buy a tremendous amount of shares before needing to announce they have taken a 5% position. With a 205Bn USD market cap, a fund could take a 10Bn dollar position before needing any announcement. Furthermore with $677M dollars worth traded every day on average, a fund could build a decent position quite quickly.

    I have no interest in buying Walmart because I have better ideas with more upside potential... But if I were managing a billion dollars I probably would not have better ideas!
    Were I considering investing in Walmart I would be concerned that a falling dollar, rising savings rate, and general economic downturn would place a lot of pressure on Walmart's sales and margins. They have already seen shrinkage in sales... I think that's likely to increase.
    I tend to think Walmart has further to fall. General P/E's still have a lot of room on the downside in this secular bear market, so I think Walmart's multiple is likely to drop too....
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    Disclaimer and Disclosure Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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