10 Years Later…Walmart, or Amazon?

Prepared for

The Economist Case Competition

Prepared by

The Tulane Valuation Team:

Ryan Cohagen

Kris Khalil

Ruiqing Zhang

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TABLE OF CONTENTS

Abstract ................................................................................................................................3

1. Recent Performance, News, Industry Overview ..................................................................4

1.1. Amazon ................................................................................................................................4

1.1.1. Recent Performance .............................................................................................................4

1.1.2. Recent News ........................................................................................................................4

1.2. Walmart ................................................................................................................................5

1.2.1. Recent Performance .............................................................................................................5

1.2.2. Recent News ........................................................................................................................5

2. Valuation Comparison ..........................................................................................................6

3. Changes WMT Must Make to Compete in the Internet Age ...............................................8

4. Converting AMZN Ubiquity to Profitability .......................................................................9

5. Does Profitability Matter? ..................................................................................................10

5.1. Related Companies ............................................................................................................12

5.2. Institutional Ownership Stake ............................................................................................13

6. Investment Rationale .........................................................................................................14

6.1. Rationale ............................................................................................................................14

6.2. Primary Long Strategy .......................................................................................................14

6.3. Leveraging Options ............................................................................................................14

7. Sources ...............................................................................................................................16

8. Exhibits ..............................................................................................................................16

A. 3 Year Percentage Growth of Stock Price ....................................................................16

B. 10 year AMZN to DJIA % Change ..............................................................................16

C. 10 year WMT to DJIA % Change ................................................................................17

D. Pro Forma Financial Comparison ................................................................................17

E. Wal-Mart Discounted Cash Flow Valuation ................................................................17

F. Amazon Discounted Cash Flow Valuation ..................................................................18

G. Analyst Recommendation Trends ................................................................................18

H. Wal-Mart Multiple Valuation Model ............................................................................18

I. Wal-Mart Month Covered Call Option Return Model .................................................19

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Abstract

Wal-Mart has recently announced a period of earnings stagnation, thus changing the

market's sentiment towards WMT from being a blue-chip growth play, to being a stalwart in the

years to come. The market is also expressing its skepticism on a low cost brick-and-mortar

retailer in an increasingly digitized world where companies like Amazon are drastically locking

up market share. Moreover, people are becoming more willing to pay an extra price for a better

experience and better food as is the case with Whole Foods Market.

In our opinion, the recent decline in WMT share price is a huge overreaction, and should

be exploited by any long-term investor. It has created a great opportunity for the patient value

investor to buy a blue-chip industry leaded with a 3.3% dividend yield at a conservative price.

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10 Years Later…Walmart, or Amazon?

1. BUSINESS DESCRIPTIONS

1.1 Amazon (AMZN)

Amazon.com, Inc. was founded in 1994 and is headquartered in Seattle, Washington.

Amazon operates internationally as an online retail giant. The company serves consumers

through websites such as amazon.com, amazon.ca, and amazon.com.mx, which include

merchandise and content purchased for resale from vendors and those offered by third-party

sellers. In addition, the company serves developers and enterprises through Amazon Web

Services that provides compute, storage, database, analytics, applications, and deployment

services in start-ups, enterprises, government agencies, and academic institutions. Further, it

manufactures and sells electronic devices and provides Kindle Direct Publishing. Additionally,

the company offers Amazon Prime, an annual membership program, which provides free

shipping of various items; access to instant streaming of movies and TV episodes; and access to

books to borrow and read on a Kindle device, as well as provides publishing, digital content

subscriptions, and advertising services; and co-branded credit card agreements.

1.2 Walmart (WMT) -

Wal-Mart Stores, Inc. was founded in 1945. The company was incorporated in Delaware

in 1969. Walmart operates brick-and-mortar retail stores in various formats worldwide, as well

as an online retail store. The company’s segments include Walmart U.S., Walmart International,

and Sam's Club. Walmart.com experiences on average 60 million visits a month and offers

access to approximately 8 million SKUs.

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Walmart U.S. does business in the following six strategic merchandise units, across various store

formats, including supercenters, discount stores, Neighborhood Markets and other small store

formats, as well as walmart.com. The Walmart U.S. segment also offers financial services and

related products, including money orders, prepaid cards, wire transfers, money transfers, check

cashing, and bill payment. The company also markets lines of merchandise under its private-

label store brands.

2. RECENT PERFORMANCE, NEWS, INDUSTRY OVERVIEW

2.1 Amazon

i. Recent Market Performance

Amazon’s stock has been skyrocketing over the most recent one year from $290.74 to

$654.18. Amazon provided returns of 35% in 2013, a decrease of 1.2% in 2014, and 86% in

2015 YTD. AMZN has been one of the main hedge fund darlings in the market as of late, and

analysts project no change in the near future. As seen in Appendix 2, AMZN is up 1,470%

relative to the Dow Jones Industrial Average which is up 71% over the last 10 years.

ii. Recent News

Amazon reported third-quarter earnings of 17 cents per share on $25.36 billion in

revenue. Analysts expected Amazon to post a loss of 13 cents per share on $24.91 billion in

revenue, according to a consensus estimate from Thomson Reuters. These positive results were

driven by strength in Amazon Web Services and its Prime ecosystem. With the data center

pricing environment becoming more rationalized, AWS could continue to drive near-term

growth. As for the medium-term, AMZN's Prime ecosystem is continuing to gain steam with

some estimated 60-80 million users globally, and the higher purchase frequency as well as larger

order size from the Prime users will likely to be supportive of AMZN's fourth quarter numbers

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during the upcoming holiday season. The Company’s strong outlook suggests that near-term

strengths in ecommerce and AWS are sustainable.

It's worth noting that AMZN's success is partially driven by the strength of its ‘members’,

a model that is also adopted by Alibaba, with its focus on mobile payment, media, quick delivery

and internet finance, which is one of the reasons behind its competitive position in China. In

terms of competitive outlook, we expect AMZN to remain the dominant leader in North America

in the medium term. However, the long-term outlook could be less optimistic given the increased

focus BABA has on the US market. The recent partnership of BABA and the US Postal Office

and the ramp up of its data centers are all good indicators that BABA is building its

infrastructure in the US, and this will eventually compete head-on against AMZN.

2.2 Wal-Mart

i. Recent Performance

Wal-Mart’s stock has been on the decline over the last year, with analysts predicting no

foreseeable changes in the near future. WMT has provided returns of 9% in 2013, 17% in 2014,

and decrease of 30% in 2015 YTD, as seen in Appendix 3, WMT is up 21% relative to the

Dow Jones Industrial Average which is up 71% over the last 10 years.

ii. Recent News

Wal-Mart posted 2nd quarter earnings of $1.08 per share, down from $1.21 a share in the

year-earlier period. Revenue edged up to $120.2 billion from $120.13 billion a year

ago. Analysts expected earnings of $1.12 a share on $119.72 billion in revenue, according to a

consensus estimate from Thomson Reuters. Wal-Mart’s stock price took a beating after they

provided recent negative guidance on EPS at their recent stockholder meeting.

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Wal-Mart said its profits were being weighed down by a decision to increase the hours of

store greeters and stocking positions, part of its push to improve customer service. We believe

that the recent plunge in the market value of Wal-Mart is a great opportunity for the long-term

investor to buy a supreme heavyweight at a value price. Below are a few key reasons why Wal-

Mart’s stock has lost so much value recently and why we feel it is a great long-term buy:

The fierce battle with Amazon and other retailers has forced WMT to increase

investments in its online shop. Noted in their most recent 8-K filing, in 2017 WMT will

invest approximately $1 billion in its online store. We actually see this as a long-term

positive for WMT, as they are currently well-behind Amazon in online retail sales.

WMT also has committed to investing substantial capital in improving its stores, making

way for an improved customer experience, increased trips to the stores, and longer time

spent at the stores.

WMT will increase wages going forward for its employees, resulting in higher costs for

the Company. WMT has been heavily criticized in the past for its compensation policies

& treatment of employees. In the current fiscal year, the average hourly wage will be

increased to $9, and then $10 in 2017. This increase alone will result in extra costs of

$1.2B in 2016 and $1.5B in 2017. This wage will constitutes 75% of the announced EPS

reduction.

Again, this is where ‘bad news” for short-term investors can turn out to be fantastic news

for long-term investors. With lower employee turnover and increased motivation through higher

wages, WMT is seeking to improve the customer experience and long-term profitability as well.

The employee turnover in US retail is currently 5% per month - a very high turnover which in

turn gives WMT a lot of problems.

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3. PRO-FORMA AND VALUATION COMPARISON

3.1 Market share in ten years is the foundation behind our valuation assumption

In our DCF valuation model, we assume that, in ten years, both companies can keep their

current growth pattern for five years and then turn to stable. behind the assumption, we expect

that Walmart will be successfully adapt its operation model with internet retail era and defend

their current market share, in other words, Walmart can successfully extend their maturity stage

but not enter declining stage, and that amazon will successfully implement its strategy,

sacrificing current profitability, investing in growth, and earn long-term profitability, in other

words, Amazon will be able to successfully compete in market share expansion, enter the

maturity stage of internet retail model and successfully become one of the industry leaders.

3.2 Investor’s expectation of the future growth rate led to different P/E ratio

Amazon has a high P/E ratio, which is 944.66x on Nov. 8, 2015, while Walmart P/E ratio

is 12.27x. Different P/E ratios are result from investor’s different expectations onto the growth

rates of both companies. Prices of both companies have big differences with the result of our

DCF model. For Walmart, our target price $286.9, which is 4.92 times of current market price:

$ 58.37. For Amazon, the price we turned out is $447.35, which is 67.85% of current market

price: $659.37. By comparison, we conclude that market expect amazon will have higher than

current growth rate, and Walmart will have lower than current growth rate.

3.3 Pro-forma financial performance comparison

In order to make both companies’ future financial performances are comparable,

eliminate our team’s biased preference onto each of companies, and based on our fundamental

market share assumption, we projected the financial statements from Q4 2015 through 2025 in

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three stages: First, forecast period through 2020; second, stable growth period from 2021 to

2015; third, terminal period 2016 and after.

3.4 Discounted Cash Flow Valuation

Based on the same assumption of 2.34% risk free rate and 5.92% of market risk premium,

we Utilize current WACC of 10.96% for Amazon and 4.69% for Walmart and arrive at a

valuation both companies using the perpetuity growth method. The value of Walmart we arrived

is $286.9, and the value of Amazon we arrived is $447.35.

4. CHANGES WMT MUST MAKE TO COMPETE IN THE INTERNET AGE

Wal-Mart is currently at a disadvantage in regards to its competitive position against

online retailers in an economy that is increasingly reliant upon the internet. We feel as though

the Company recognizes this fact, and is taking steps to make improvements (see the $1Bn

investment in online retail noted above). Yet, it may not be enough if WMT does not move

quickly and seek to challenge web behemoths such as AMZN and BABA by implementing one

or more of the following strategies:

Increase foot traffic in-store - Walmart saw foot traffic in U.S. stores fall for about a year

before trending back up during the most recent holiday shopping season. As of the third

quarter, foot traffic was up about 1% in U.S. stores. While WMT seeks to grow its online

retail business, they must seek ways to leverage their brick-and-mortar operations. WMT

may accomplish this goal through unique user-experiences for customers.

Increase employee engagement with customers - As WMT increases wages for workers,

the retailer must re-define what it means to be an employee of the store. One way WMT

will be able to compete is by face-to-face interaction with customers. Employees must

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turn from shelf-stockers into sales-people and become more knowledgeable about the

products and services WMT offers.

Implement new technology to satisfy customers’ instant gratification needs - One of the

reasons AMZN is winning the online retail war, is that they make it very easy for a

customer to order a product and get it delivered ASAP (sometimes even the same day).

Amazon is currently opening hundreds of Amazon Locker locations around the country,

and WMT must counter this activity with innovations of their own. Whether WMT does

this through drone deliveries (WMT recently filed with the FAA for this very purpose),

or through subscription-based grocery shopping, WMT must begin offering new and

innovative ways to get customers the products they want, without having to wait or take a

trip to the store.

Offer a “prime-like” service for discounts, free delivery, and free in-store pickup - WMT

has already announced its intentions to run a trial on a subscription based shipping

service similar to Amazon Prime, but it is clear that management wishes to shy away

from any co-op model. "We just don't believe you should pay a fee to get a better price,"

said Walmart spokesman Ravi Jariwala in a recent interview.

5. CONVERTING AMZN UBIQUITY TO PROFITABILITY

Amazon is not only the biggest online retailer in the world, but one of the most influential

businesses in history. The company has undoubtedly revolutionized the publishing industry, as

well as made major impacts on entertainment and retail. Amazon's growth has reshaped online

shopping for millions of consumers, and has caused supermarkets to rethink what they sell and

how they sell.

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However, for all Amazon's remarkable revenue growth, the company has still not

demonstrated that it can generate profit consistently. It is clear that this is not by pure

circumstance, but in fact by choice.

Amazon’s goal is to increase market-share, drive revenue, increase Amazon Prime

memberships, and re-invest cash flow into new and exciting projects. Jeff Bezo’s Company

Model (Appendixt 4) originally drawn on a napkin by Jeff Bezos himself exemplifies the model

in which his company has been utilizing for over 20 years. It seems as though there’s no change

in policy in sight, yet soon the company may be consistently posting profits, as it did in Q2 of

2015. Despite the lack of dividends or profits, Amazon’s stock price continues to surge due to

over-excitement from the market, high growth rates, and new products and technologies being

released quarter-after-quarter. Amazon has decidedly skirted making profits simply because it

remains in investment mode. This may sound somewhat surprising considering that the 20 year

old company is now the world's largest online retailer, but it is a strategy that has paid off for

shareholders to date.

Amazon's poor profitability is not a problem for today’s shareholders, as the company is

using most of its free cash flow to aggressively invest in new products and services. It is

investing in warehouses and data centers. It is selling its Kindle fire at cost or less-than-cost, and

giving one-year free Amazon Web Services subscriptions to developers.

In stark contrast to Amazon, Wal-Mart made more than $16 billion in profit last year.

However, the company faces a strong trade-off between maintaining margins and pursuing sales

growth. Thus, the Company has come out and reduced earnings expectations for the next few

years while they revisit their low-price strategy and determine how to thrive in the internet age.

6. DOES PROFITABILITY MATTER?

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Compared with the Walmart traditional retail business model, Amazon’s internet

business model is relatively young and in its growth stage. In the past ten years, amazon realized

sales growth approximately 30% each year on average. Building brand loyalty, providing best

service, and achieving the maximum share of the market are the most critical strategy for

Amazon in its current growth stage. Amazon need to set it prices low in order to penetrate the

market, spend more on extending distribution channels and targeting the mass market. We

conclude that for amazon, in order to build a large market share, profitability is not critical at this

stage. However, building customer loyalty is more important for long-term profitability. We

expect amazon could achieve its target market share in five years and start to improve its

profitability. Amazon's history clearly shows that profits are a secondary concern to revenues.

In contrast, Walmart traditional retail model has a longer history, and has entered its

maturity stage. At this stage, sales peak and growth declines as demonstrated by Walmart past 10

year financial data. The average sales growth of Wal-Mart in the past ten years is only 5.09%

compare with 30.03% of amazon. However, as a large market-share entity, Walmart has already

successfully built its customer base and distribution channels, and Walmart has the ability to

create relative higher profit. In the past ten years, Walmart generated average 3.48% of net profit

compared with 1.86% of Amazon. With the emergence of a new internet retail model, the most

important competitive strategy of Wal-Mart is to defend its current market share and maximize

profit through diversification of its business model and increased investment on developing

internet retail model.

7. INVESTMENT RECOMMENDATION

7.1 Rationale

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We have found that Wal-Mart is the best choice for a ten year investment. Wal-Mart

has consistent financial history that gives us greater confidence in forecasting for the next ten

years. Wal-Mart’s executive team is forward looking, and provides historically accurate

guidance on their expectations. Wal-Mart also provides a consistent dividend yield with direct

verbiage to validate continued growth. We feel that Wal-Mart is currently undervalued relative to

their current performance and future projections.

Amazon, which has wildly sporadic historical financial performance, is too risky at

their current price. The company does not provide dividends, which would require a minimum of

3-4% increase in stock price each year just to match Wal-Mart’s dividend yield. Amazon has

seen substantial increases in stock price over the last year, which makes us nervous about

Amazon continuing this growth pattern.

7.2 Primary Long Strategy

The best strategy based on future forecasts (Appendix 5) is a long position in Wal-

Mart. We feel that Wal-Mart is undervalued at this time, and that its financial consistency, along

with dividend yield make it the best choice for a 10-year position.

7.3 Leveraging Options

Wal-Mart’s 10-year outlook is strong, but management has provided guidance that

explains a decrease in EPS from capital expenditures to increase online sales growth. The

increase in CAPEX is projected to last until 2017, and EPS will rebound in 2019. To combat this

period of stagnant growth, we are going to implement a monthly covered call writing strategy

until January 2019. With this strategy (Appendix 6) we will capitalize on small increases in

stock price, the dividend yield, and the option premiums. In 2019 we believe that the stock price

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of Wal-Mart will begin to rise at a rate that may result in capping our maximum gains if we

continue to write call options.

8. APPENDIX

Appendix 1: 3 Walmart Year Percentage Growth of Stock Price

Appendix 2: 10 year AMZN to DJIA % Change

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Appendix 3: 10 year WMT to DJIA % Change

Appendix 4 Exhibit J: Jeff Bezo’s Company Model

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Appendix 5: Wal-Mart Multiple Valuation Model

Appendix 6: Wal-Mart Month Covered Call Option Return Model

Appendix7 Pro-forma Common Size Income Statement-Walmart (Ruiqing)-done

Appendix8. Key Ratio Comparisons - (Ruiqing)-done

Red Text Based on Management Guidance

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025

Revenues 485,651.00$ 500,220.53$ 520,229.35$ 541,038.53$ 557,619.12$ 574,707.84$ 592,320.25$ 610,472.42$ 629,180.87$ 648,462.66$ 668,335.36$

Costs 469,288.00$ 485,400.00$ 502,164.56$ 521,800.00$ 538,255.98$ 554,751.30$ 571,752.13$ 589,273.96$ 607,332.77$ 625,945.01$ 645,127.63$ Net Income 16,363.00$ 14,820.53$ 18,064.79$ 19,238.53$ 19,363.14$ 19,956.54$ 20,568.13$ 21,198.45$ 21,848.10$ 22,517.65$ 23,207.72$

Total Shares 3,243.00 3,108.46 3,001.88 2,905.09 2,811.42 2,720.77 2,633.05 2,548.15 2,465.99 2,386.48 2,309.53

EPS 5.05$ 4.77$ 6.02$ 6.62$ 6.89$ 7.33$ 7.81$ 8.32$ 8.86$ 9.44$ 10.05$

16,363.00$ 14,820.53$ 18,064.79$ 19,238.53$ 19,363.14$ 19,956.54$ 20,568.13$ 21,198.45$ 21,848.10$ 22,517.65$ 23,207.72$

Share Buyback $ Value (10,000.00)$ (10,000.00)$ (9,992.71)$ (10,057.43)$ (10,365.65)$ (10,683.32)$ (11,010.72)$ (11,348.15)$ (11,695.92)$ (12,054.35)$ Share Price 57.10$ 74.33$ 93.82$ 103.24$ 107.37$ 114.35$ 121.78$ 129.70$ 138.12$ 147.10$ 156.66$

P/E 15.59 15.59 15.59 15.59 15.59 15.59 15.59 15.59 15.59 15.59 15.59

Expected

2015 2016 2017 2018

Gross Profit -$ 67.00$ 18.19$ 75.74$

Net Profit 16.00$ 85.26$ 39.01$ 99.49$

Net Profit % 0.3% 1.1% 0.4% 1.0%

Annualized Net Profit % 3.4% 13.8% 5.0% 11.6%

1.00 1.14 1.19 1.33

Total return 0% 13.76% 19.44% 33.25%

In Millions of USD except Per Share FY 2016 Est FY 2017 Est FY 2018 Est FY 2019 Est FY 2020 Est FY 2021 Est FY 2022 Est FY 2023 Est FY 2024 Est FY 2025 Est FY 2026 Est

12 Months Ending 01/31/2016 01/31/2017 01/31/2018 01/31/2019 01/31/2020 01/31/2021 01/31/2022 01/31/2023 01/31/2024 01/31/2025 01/31/2026

Revenue 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

- Cost of Revenue 75.16% 75.17% 75.17% 75.17% 75.17% 75.17% 75.14% 75.14% 75.14% 75.14% 75.14%

Gross Profit 24.84% 24.83% 24.83% 24.83% 24.83% 24.83% 24.86% 24.86% 24.86% 24.86% 24.86%

- Operating Expenses 19.24% 19.24% 19.24% 19.24% 19.24% 19.24% 19.51% 19.51% 19.51% 19.51% 19.51%

Operating Income (Loss) 5.60% 5.59% 5.60% 5.60% 5.60% 5.60% 5.35% 5.35% 5.35% 5.35% 5.35%

- Non-Operating (Income) Loss 0.43% 0.46% 0.46% 0.46% 0.46% 0.47% 0.43% 0.42% 0.41% 0.40% 0.39%

Pretax Income 5.17% 5.14% 5.14% 5.14% 5.13% 5.13% 4.91% 4.92% 4.93% 4.95% 4.96%

- Income Tax Expense (Benefit) 1.66% 1.66% 1.65% 1.65% 1.65% 1.65% 1.58% 1.59% 1.59% 1.59% 1.60%

Income (Loss) from Cont Ops 3.52% 3.48% 3.48% 3.48% 3.48% 3.48% 3.33% 3.34% 3.35% 3.35% 3.36%

- Net Extraordinary Losses (Gains) 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Income (Loss) Incl. MI 3.52% 3.48% 3.48% 3.48% 3.48% 3.48% 3.33% 3.34% 3.35% 3.35% 3.36%

- Minority Interest 0.14% 0.14% 0.14% 0.13% 0.13% 0.13% 0.12% 0.11% 0.11% 0.11% 0.11%

Net Income, GAAP 3.37% 3.33% 3.35% 3.35% 3.35% 3.35% 3.21% 3.22% 3.23% 3.24% 3.25%

Source: Bloomberg, Company Financials and Group Estimates

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Appendix 9: Pro Forma Financial Performance Comparison

Appendix10 Valuation Assumptions-Walmart & Amazon

01/31/2011 01/31/2012 01/31/2013 01/31/2014 01/31/2015 12/31/2010 12/31/2011 12/31/201212/31/2013 12/31/2014

Profitability:

Return on Assets% 9.07% 8.12% 8.37% 7.83% 8.03% 6.13% 2.50% -0.12% 0.68% -0.44%

Return on Equity% 23.91% 22.01% 22.27% 21.01% 20.10% 16.78% 8.13% -0.48% 2.81% -2.24%

Gross Margin% 25.26% 25.02% 24.87% 24.82% 24.83% 22.35% 22.44% 24.75% 27.23% 29.48%

EBITDA Margin % 7.87% 7.76% 7.74% 7.50% 7.48% 5.77% 4.05% 4.64% 5.37% 5.53%

EBIT Margin% 6.05% 5.94% 5.93% 5.64% 5.59% 4.11% 1.79% 1.11% 1.00% 0.20%

Net Income Margin % 3.89% 3.51% 3.62% 3.36% 3.37% 3.37% 1.31% -0.06% 0.37% -0.27%

Efficiency:

Total Asset Turnover 2.33 2.31 2.31 2.33 2.38 1.82 1.90 1.88 1.85 1.63

Fixed Asset Turnover 3.91 3.98 4.02 4.04 4.16 14.17 10.88 8.65 6.80 5.24

Accounts Receivable Turnover 82.89 75.28 69.32 71.33 71.65 21.55 18.70 18.16 15.62 15.86

Inventory Turnover 11.58 10.98 10.71 10.62 10.76 10.68 9.63 10.13 10.05 10.72

Short Term Liquidity:

Current ratio 0.89 0.88 0.83 0.88 0.97 1.33 1.17 1.12 1.07 1.12

Quick Ratio 0.21 0.20 0.20 0.20 0.24 1.00 0.82 0.78 0.75 0.82

Cash Ratio 0.13 0.11 0.11 0.10 0.14 0.84 0.64 0.60 0.54 0.62

Solvency Ratio:

Debt to Equity Ratio 0.64 0.66 0.54 0.58 0.54 0.23 0.34 0.38 0.33 0.77

Total Liabilities/Total Assets 0.61 0.61 0.60 0.60 0.58 0.63 0.69 0.75 0.76 0.80

Interest Coverage Ratio 12.75 12.30 13.47 12.13 11.56 -15.45 -11.97 5.12 3.12 0.62

Cash Flow Ratio:

Internal Financing Ratio (CFO/Capex)1.86 1.80 1.98 1.77 2.35 2.63 1.55 0.92 1.46 1.17

CFO to Current Liabilities 0.40 0.39 0.36 0.34 0.44 0.34 0.26 0.22 0.24 0.24

CFO to Sales Ratio 0.06 0.05 0.05 0.05 0.06 0.10 0.08 0.07 0.07 0.08

Altman Z-score:

Working Capital/Total Assets 0.23 0.24 0.25 0.25 0.25 0.18 0.10 0.07 0.04 0.06

Retained Earnings/Total Assets 0.35 0.36 0.36 0.37 0.42 0.07 0.08 0.06 0.05 0.04

EBIT/Total Asset 0.14 0.14 0.14 0.13 0.13 0.07 0.03 0.02 0.02 0.00

MV of equity/BV of total liability 1.48 1.56 1.81 1.87 2.26 6.80 4.50 4.67 6.02 3.30

Sales/Total Asset 2.33 2.31 2.31 2.33 2.38 1.82 1.90 1.88 1.85 1.63

Z-Score 4.44 4.47 4.62 4.68 5.05 6.44 4.92 4.90 5.63 3.73

shares outstanding 3516.0 3418.0 3314.0 3229.2 3228.0 451.0 455.0 454.0 459.0 465.0

Close Price at the end of the year 46.13 53.86 66.12 71.5 82.34 180 173.1 250.87 398.79 310.35

Growth Over prior year

Revenue 3.37% 5.95% 4.97% 1.52% 1.96% 39.56% 40.56% 27.07% 21.87% 19.52%

Operating margin 6.42% 3.98% 4.68% -3.34% 1.02% 38.18% 41.16% 40.16% 34.05% 29.43%

EBITDA 6.50% 4.54% 4.65% -1.54% 1.62% 30.99% -1.47% 45.76% 41.02% 23.16%

EBIT 6.42% 3.98% 4.68% -3.34% 1.02% 24.53% -38.69% -21.58% 10.21% -76.11%

Assets 6.09% 6.98% 5.01% 0.81% -0.51% 36.08% 34.48% 28.79% 23.36% 35.72%

Source: Company Financials and Group Calculation

Walmart Amazon

Walmart Amazon Walmart Amazon Walmart Amazon Walmart Amazon Walmart Amazon

growth rate 2.790% 12.000% 2.930% 10.710% 2.840% 9.680% 2.690% 8.820% 2.670% 8.110%

Gross margin 24.829% 34.098% 24.831% 34.184% 24.833% 34.141% 24.831% 34.162% 24.831% 34.152%

Operating margin 5.593% 1.701% 5.595% 1.751% 5.597% 1.726% 5.595% 1.739% 5.596% 1.732%

EBITDA margin 7.430% 4.670% 7.410% 4.584% 7.381% 4.200% 7.310% 4.036% 7.275% 3.874%

Net margin 3.336% 0.355% 3.350% 0.313% 3.352% 0.225% 3.350% 0.161% 3.354% 0.086%

ROA 7.351% 0.531% 7.330% 0.437% 7.287% 0.295% 7.238% 0.199% 7.204% 0.100%

FY2016 FY2017 FY2018 FY2019 FY2020

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For fiscal year 2015 (Walmart expressed as 2016, as the company’s twelve months report

ending at January first of each year), the forecast is derived from the first three quarters of data

and our estimates of fourth quarter performance. we use the following assumptions to forecast

financial performance in the 2016-2025 periods ( correspondingly, Walmart expressed as 2017-

2016).

1. Revenue

Walmart: Based on the historical quarterly data, as other retail business, seasonal effect

has obvious impact onto Walmart revenue. Revenues in Q4 are usually much higher than each of

first three quarters. We expect the seasonal pattern will continue in the future, and Walmart can

successfully defend its current market share and maintain its current profitability within ten

years. Based on this assumption, we use two statistical techniques, Multiplicative seasonal effect

technique and Trend analysis technique to forecast the future revenue of Q3 2016 to Q4 2021.

(see historical and forecasted revenue pattern in exhibit #)

Amazon: revenue include Net product sales and net service sales. (see shift in revenue

mix). Similar with Walmart, quarter revenues of Amazon showed seasonal effect two, but

obviously higher growth rate compared with that of Walmart. based on the same assumption that

seasonal pattern and growth pattern will continue until 2020. we expect amazon can successfully

implement its expansion strategy and maintain its current return of capital and reinvestment rate.

we use the same statistical technique to forecast the future revenue of Q4 2015 to Q4 2020. (see

historical and forecasted revenue pattern in exhibit #)

2. Growth rate from 2022 to 2026

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Walmart: We assume that Walmart EBIT growth rate start to keep constant from 2022 to 2026 as

the market share position of each company in the industry will be formated. the constant growth

rate is calculated using 2 month weighted average technique and the weights are calculated by

excel solver to minimize the means square error. (see calculation for constant EBIT growth

between 2022 and 2026 in exhibit #)

Amazon: as amazon temporarily didn’t generate high operating profit margin, we forecast

growth rate of revenue. based on the same assumption with Walmart, we expect revenue growth

rate become relatively between 2021 and 2026. we calculated the revenue growth rate for each

year by using weighted average technique. (see calculation for constant revenue growth between

2021 and 2025 in exhibit #)

3. Gross Margins and operating expenses

Walmart: Cost of sales primarily consists of actual product cost and the cost of transportation,

and all other operating expenses are recorded as Operating, Selling, general and administrative

expenses. as Wal-Mart has built its mature and stable distribution channel and supplier

relationships, we expect the gross margin and operating expenses relatively keep constant and

use moving average and weighted moving average technique respectively to calculate gross

margin and operating margin in the forecasting period.

Amazon:Operating expenses are classified into six categories: Cost, Fulfillment, Marketing,

Technology and content, general and Administrative, and other operating expenses. Cost of sales

include the purchase price of consumer products and digital media, inbound and outbound

shipping costs, and related equipment costs. we expect Amazon will keep current gross margin

20

level and continue its current investment level for expanding market shares. we use 2 month

weighted moving average technique to forecast the cost/revenue ratio and operating cost/revenue

ratio between 2016 and 2020. However, with the expanded market share, we expect amazon will

successfully implement strategies to reduce total operating expense/ revenue ratio by 2% each

year start from 2021 to 2025, such strategies include the shift in revenue mix towards better

operating profit margin.

4. Non-operating income ( expenses)

Walmart: Other income (expense) primarily consists of interest income and expenses, foreign

exchange gains (losses), and other non-operational income (loss). For forecasting purposes, we

only forecast net interest expenses. interest expenses represent expenses on revolving credit

facility used by Walmart, so interest expenses are directly derived by the long-term debt that the

company have in the previous year. we expect Walmart will keep constant debt ratio in forecast

period and the constant leverage ratio 21.53% is calculated by using exponential smoothing

technique which consider all past observations. ( see calculation for constant D/V ratio in exhibit

# )

Amazon: we based on the same assumption as we do on Walmart, and use the same statistical

technique to forecast the future interest expense. we expect Amazon will keep constant leverage

ratio of 19.29% between 2015 and 2020 and then keep constant interest expenses. ( see

calculation for constant D/V ratio in exhibit # )

5. Income tax expenses

Walmart:Income tax expenses primarily consists of U.S. as well as international corporate

income taxes related to profits. Historically, Walmart ‘s effective income tax rate is lower than

21

the U.S. statutory tax rate primarily because of benefits from lower-taxed global operations, in

addition, certain non-U.S. earnings have been indefinitely reinvested outside the U.S. and are not

subject to current U.S.income tax. we expect effective tax rates are tax rates of moving average

of previous three months.

Amazon: income tax expense include U.S.(federal and state) and foreign income taxes. as has a

uncertain income tax position due to tax contingencies as illustrated in 2014 annual report, we

assume amazon tax rate is 39%

6. Asset

Total Asset.

Walmart: We expect Walmart to be able to maintain this current net income margin, dividend

policy and leverage ratio, and therefore, total asset keep expanding by its historical linear path.

Amazon: Based on the same assumption with Walmart.

PP&E

Walmart: PP &E consists of land, building and improvements, Fixtures and equipment,

transportation equipment and construction in progress. we expect PP& E investment pattern keep

current level and we use 3 month moving average to forecast the PP&E expense in forecast

period.

Amazon: Based on the same assumption with Walmart

7. Liabilities

22

Walmart: Debt. There was $ 4103 debt mature in 2015and will be $4810 debt mature in 2016;

while Walmart issued $5030 new debt in fiscal year 2015 and $6700 new debt in fiscal year

2014. we expect the leverage ratio to remain constant during the forecast period.

Amazon: based on the same assumption, we expect the leverage ratio remain constant during the

forecast period.

8. Equity

Walmart: Share repurchase activity is depends on the management’s consideration of current

cash needs, capacity for leverage, cost of borrowings, result of operations and the market price of

common stock, etc. for forecast purpose, we assume there is no further issuance and repurchase

of common stock.

Amazon: based on the same assumption.

9. Weighted Average Cost of Capital

Walmart

Variable Value Notes

Risk Free rate 2.34% 10-yr treasury bond yield as of 07/11/2015 (http://finra-markets.morningstar.com/BondCenter/Default.jsp)

Market Premium 5.92% Implied ERP on Nov.2015 calculated by average CF yield last 10 years ( A. Darmodaran)

Beta 0.464598 Yahoo Finance as of 11/07/2015

Cost of Debt 4.40% Weighted-average variable rates based upon prevailing market rates at Jan. 31 2015 ( 2015 annual report)

Market Cap 188450 Market cap as of 07/11/2015

Debt 43692 Forecasted ending balance of debt at Jan 31, 2016

Tax rate 32.20% Effective tax rate based on team forecast ( moving average)

Cost of equity 5.09% Team Calculation

WACC 4.69% Team Calculation

Amazon

Variable Value Notes

Risk Free rate 2.34% 10-yr treasury bond yield as of 07/11/2015 (http://finra-markets.morningstar.com/BondCenter/Default.jsp)

Market Premium 5.92% Implied ERP on Nov.2015 calculated by average CF yield last 10 years ( A. Darmodaran)

Beta 1.49107 Yahoo Finance as of 11/07/2015

Cost of Debt 5.50% Weighted-average interest rate as of December 31, 2014 and 2013 ( 2014 annual report)

Market Cap 309090 Market cap as of 07/11/2015

Debt 8265 Forecasted Ending balance of debt at Nov. 30, 2015

Tax rate 39.00% U.S. Corporate tax rate

Cost of equity 11.17% Team Calculation

WACC 10.96% Team Calculation

23

Appendix 11 Discounted Cash Flow Valuation-Walmart

Appendix 12 Discounted Cash Flow Valuation-Amazon

Appendix 13: Analyst Recommendation Trends

Terminal

2016 Q4 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027

EBIT 7577.01 28391.16 29223.16 30053.47 30863.40 31687.90 32538.40 33409.55 34305.22 35224.25 36168.25

EBIT*(1-Tax) 5137.21 19249.20 19813.31 20376.25 20925.39 21484.39 22061.04 22651.68 23258.94 23882.04 24522.07

Depreciation 2639.40 9326.60 9478.80 9580.73 9462.04 9507.19 9516.66 9495.30 9506.38 9506.11 9502.60

CAPEX 344.20 9339.39 10079.02 10058.35 9811.60 9988.00 10303.10 10553.15 10850.21 11133.13 11435.75

Change in working capital -671.14 -2960.60 -3236.65 -3512.70 -3788.75 -4064.80 -4340.85 -4616.90 -4892.95 -5169.00 -5445.05

Free cash flow to firm 8103.55 22197.02 22449.73 23411.34 24364.58 25068.39 25615.45 26210.72 26808.06 27424.02 28033.97 28689.96

Perpetuity method Sensitivity Analysis on WACC and terminal growth rate

FCF terminal growth rate 2.34%

Terminal value 1199250.21 283.63 0.34% 0.84% 1.34% 1.84% 2.34% 2.84% 3.34%

PV of the terminal value 755270.20 4.23% 198.88 221.65 252.30 295.76 362.18 476.31 718.33

PV of free cash flow 193754.83 4.73% 173.99 190.83 212.65 242.00 283.63 347.25 456.57

enterprise value 949025.03 5.23% 154.17 167.01 183.15 204.05 232.17 272.05 333.00

- Net Debt 38581.00 5.73% 138.02 148.04 160.34 175.81 195.84 222.78 261.00

equity value 910444.03 6.23% 124.60 132.58 142.18 153.97 168.80 187.99 213.82

# of shares 3210.00 6.73% 113.28 119.73 127.37 136.58 147.89 162.10 180.49

price per share 283.63 7.23% 103.59 108.88 115.06 122.39 131.22 142.06 155.69

Current price 58.78 7.73% 95.22 99.60 104.67 110.60 117.63 126.10 136.50

Potential upside 382.52% 8.23% 87.90 91.58 95.78 100.64 106.33 113.08 121.20

8.23% 87.90 91.58 95.78 100.64 106.33 113.08 121.20

Notes: Yellow areas represent prices above $283.63 per share or more than 382.52% potential upside (current prices of $58.78 as of Nov 7, 2015), which yield a strong buy recommendation.

Forecast period

Terminal growth rate

WACC

Terminal

Q415 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

EBIT 584.28 1709.28 1975.69 2251.67 2434.27 2668.23 2874.17 6716.49 11170.26 16329.47 22265.35

EBIT*(1-Tax) 356.41 1042.66 1205.17 1373.52 1484.91 1627.62 1753.24 4097.06 6813.86 9960.98 13581.86

Depreciation -1154.46 3447.75 3643.01 3488.44 3526.40 3552.62 3522.48 3533.83 3536.31 3530.88 3533.67

CAPEX 8477.33 4782.44 5124.59 4875.46 4927.50 4975.85 4926.27 4943.20 4948.44 4939.30 4943.65

Change in working capital -3952.22 -5311.98 -5906.72 -5319.31 -5512.67 -5579.57 -5470.52 -5520.92 -5523.67 -5505.03 -5516.54

Free cash flow to firm 11631.50 14584.84 15879.50 15056.72 15451.47 15735.65 15672.51 18095.02 20822.28 23936.19 27575.72 28146.5

Perpetuity method Sensitivity Analysis on WACC and terminal growth rate

FCF terminal growth rate 2.34%

Terminal value 327250.0491 447.35 0.34% 0.84% 1.34% 1.84% 2.34% 2.84% 3.34%

PV of the terminal value 115630.18 8.96% 514.72 534.11 556.04 581.05 609.84 643.33 682.77

PV of free cash flow 102336.26 9.46% 480.21 496.78 515.38 536.43 560.43 588.06 620.20

enterprise value 217966.44 9.96% 449.44 463.69 479.59 497.45 517.65 540.69 567.21

- Net Debt 8265.00 10.46% 421.86 434.19 447.87 463.13 480.28 499.67 521.78

equity value 209701.44 10.96% 397.00 407.72 419.56 432.70 447.35 463.82 482.44

# of shares 468.76 11.46% 374.50 383.88 394.17 405.54 418.15 432.23 448.04

price per share 447.35 11.96% 354.05 362.28 371.28 381.17 392.09 404.21 417.73

Current price 659.37 12.46% 335.40 342.65 350.55 359.20 368.70 379.19 390.83

Potential downside 32.15% 12.96% 318.32 324.73 331.70 339.30 347.61 356.74 366.82

13.46% 302.63 308.33 314.49 321.19 328.49 336.48 345.25

13.96% 288.18 293.26 298.73 304.66 311.10 318.11 325.79

Notes: Red areas represent prices lower than $447.35 per share or more than 32.15% potential downside (current prices of $659.37 as of Nov 7, 2015), which yield a sell recommendation.

Forecast period

Terminal growth rate

WACC

24

Appendix 14 Additional thought:

Institutional Ownership Stake

Institutional ownership is a subject that is rarely mentioned in the valuation of a

company, but when you compare Walmart to Amazon the drastic difference is a factor that needs

consideration. The institutional ownership stake in WMT and AMZN consists of 31% and 68%,

respectively. With the current analyst projections about the two companies, (Exhibit G) it is easy

to understand why more investment firms would own amazon. 38 analysts have AMZN as a buy

or better compared to just 6 for WMT. Institutions have researchers and trusted analysts to

investigate the firm and the industry potential of the firms. The perception is that high

institutional ownership indicates good value.

In the case of AMZN though, its share price has gone up $300 in the last year and

institutional investors are still supporting that it’s going to go up even further. Amazon’s

financial guidance from their 3rd quarter 8-k says “Operating income is expected to be between

$80 million and $1.28 billion, compared to $591 million in fourth quarter 2014.” The company

itself needs a billion dollar range to estimate its income three months from now, so what is

behind all of these investors support of the company? Is it a groupthink dilemma where no

investor wants to be left out on the hot stock, or is the value really there?

Current

Month

Last

Month

Two

Months

Ago

Three

Months

Ago

Current

Month

Last

Month

Two

Months

Ago

Three

Months

Ago

Strong Buy 4 4 4 4 Strong Buy 14 14 13 11

Buy 2 2 2 3 Buy 24 23 23 18

Hold 21 21 21 20 Hold 6 6 7 14

Underperf

orm1 1 1 2

Underperf

orm0 0 0 1

Sell 2 2 2 2 Sell 0 0 0 0

WMT Recommendation Trends AMZN Recommendation Trends

25

WMT on the other hand has specific financial guidance with small projection ranges. The

company states it exact plans for share buybacks, excess capital expenditures in the future, and

its plan to increase dividend yield into the future. Yet, analysts don’t rate the company highly

and many are worried about the company’s future with online sales. When it comes to increasing

your company's stock price, leaving the company's future outlooks up to analysts may be more

beneficial in the short term.

Related Companies (profitable or not) that are over inflated or under inflated

Valeant: On September 17, 2015 Valeant was the pharmaceutical dream company for

investors. 88% of its shares were held by institutional owners and it traded at $241 a share, what

many well known investors said was a value at the time. Less than a month and a half later the

stock now trades at $81. It would seem that Valeant must have underperformed wildly under

expectations to go from $241 to $81. Yet, when you look at what caused their downfall, it does

not directly relate to any actions of the company. First, the company received scrutiny over a

commonly used pharmaceutical pricing strategy. Then, a short selling firm accused Valeant of

falsifying revenues which has still not received any validity. Lastly, a large number of carries

dropped Valeant as a drug provider over those unverified claims. Amazon looks very similar to

Valeant before their downtown. As an inv

Sources

Walmart

10-Q 2009-2015 Q1-Q4, 2016 Q1-Q2

10-K 2006, 2007,2008, 2009, 2010, 2011, 2012, 2013, 2014, 2015

26

Earnings Conference Call Q2 2016

http://stock.walmart.com/investors/default.aspx

http://finance.yahoo.com/q?s=WMT

Amazon

10-Q 2008-2014 Q1-Q4, 2015 Q1-Q3

10-K 2006, 2007,2008, 2009, 2010, 2011, 2012, 2013, 2014

Earnings Conference Call Q3 2015

http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-irhome

http://finance.yahoo.com/q?s=AMZN

Damodaran Online

http://people.stern.nyu.edu/adamodar/

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