Walmart Valuation

Walmart ValuationHolly, Thiru, Tomass, Vanessa

Company overviewWalmart opened its first store in 1962 by its founder Sam Walton and is now the largest retailer in the US.It is a chain of retail stores offering a range of different products such as groceries, pharmaceuticals, health and beauty and general merchandise.It is a public company however its still a family run business as the Walton family own over 50% of the company

Total stores11,003USA4,868International6,135Walmart operates in 26 countries outside of US. Its international arm is the fastest growing part of the business.Company overviewPast Company Performance YearRevenueEBITNet IncomeEPSTax RateJan-09404,254.0022,767.0013,381.003.3934%Jan-10408,085.0024,002.0014,370.003.7134%Jan-11421,849.0025,542.0016,389.004.4732%Jan-12446,509.0026,491.0015,699.004.5232%Jan-13468,651.0027,725.0016,999.005.0233%Jan-14476,294.0026,872.0016,022.004.8831%Growth Rate3.33%3.37%3.67%7.56%The past revenues show that Walmart has positive earnings and show an increasing trend over the past 6 years, with a revenue growth rate of 3.33%

The growth rate is calculated using the compound annual growth rate (CAGR) Past Company Performance The revenue values show that Walmart has been a stable company. This positive revenue growth is likely to continue in the foreseeable future because Walmart is the market leader and this is unlikely to change in the next few years. Approach to valuationThe method used to value Walmart is the discounted cash flow method, with the cash flows being defined as free cash flows. Value of Walmart = PV(free cash flows)

Walmart share price as at 3 July 2014

Source: MarketwatchWACCCalculation of firms cost of capital with proportional weightingDefined as:WACC = E/V * RE + D/V * RD * (1-TC) Shows interest needed to be paid pr. financed dollar and thus also the overall required return for the firmThis is the rate used for discounting the free cash flowsDebt and equity ratiosE/V= 0.83D/V = 0.17

D = Book value of debt= 49,441

E = Market value of shareholders equity= 75.69*3,230= 244,479

V = D + E= 293,920Source: http://finance.yahoo.com/q/bs?s=WMT+Balance+Sheet&annual9Cost of equity = E(r) = rf + (rm rf) = 0.04 + 0.37 (0.11 0.04) = 6.6%Risk free rate = rf = 4%Source: 3,5-3,6% using 20 year T-BillExpected market return = E(r) = 11%Source: Average return on stock market Beta of the security = 0.37Source: Yahoo Finance key statistics

Calculating WACC componentsCost of equityCalculating WACC componentsCost of debt2. Cost of debt = interest expense / total debt= 5%

3. Corporate tax rate = earnings before tax / income taxes= 32.87%

Jan-14Debt interest expense2072.00Long-term debt41771.00Cost of debt0.05Jan-14Earnings before tax24,656.0Income Taxes8,105.0Tax Rate0.32872Calculating Walmart WACCWACC = E/V * RE + D/V * RD * (1-TC)= 0.83*0.066 + 0.17*0.05 (1-0.3287) = 0.0605= 6.05%

How to compute free cash flowsFree cash flow:Cash flows which are produced by operations Available for distribution to capital providers without impacting sustainability of business & growthTo obtain free cash flows, two adjustments are made to the net operating cash flowsReinvestment into the business (long-term assets)Payments to capital providers (interest payments)

Free cash flowsOperating cash flowsOperating activities12 months endedIn Millions, USDJan-14Jan-13Jan-12Jan-11Jan-10Jan-09Net income16,551.017,704.016,408.015,959.014,962.013,734.0Adjustments to reconcile net income to OCFDepreciation and amortization8,870.08,478.08,106.07,641.07,157.06,739.0Deferred income taxes-279.0-133.01,050.0651.0-504.0581.0Other938.0602.0468.01,087.0318.0752.0Changes in operating assets and liabilities:Accounts receivable-566.0-614.0-796.0-733.0-297.0-101.0Inventories-1,667.0-2,759.0-3,727.0-3,086.02,213.0-184.0Accounts payable531.01,061.02,687.02,557.01,052.0-410.0Accrued liabilities103.0271.0-935.0-433.01,348.02,036.0Accrued income taxes-1,224.0981.0994.00.00.00.0Net cash provided by operating activities23,257.025,591.024,255.023,643.026,249.023,147.0Source: Walmart 2014 Annual Report and Walmart 2011 Annual ReportInvesting activitiesJan-14Jan-13Jan-12Jan-11Jan-10Jan-09AveragePayments for property and equipment-13,115.0-12,898.0-13,510.0-12,699.0-12,184.0-11,499.0-12,650.8Proceeds from disposal of property and equipment727.0532.0580.0489.01,002.0714.0674.0Proceeds from disposal of certain international operations, net 0.00.00.00.00.0838.0139.7Investments and business acquisitions, net of cash acquired -15.0-316.0-3,548.0-202.00.0-1,576.0-942.8Other investing activities 105.071.0-131.0219.0-438.0781.0101.2Net cash provided by investing activities-12,298.0-12,611.0-16,609.0-12,193.0-11,620.0-10,742.0-12,678.8Source: Walmart 2014 Annual Report and Walmart 2011 Annual ReportFree cash flowsInvesting cash flowsInvesting activitiesAverageExplanationPayments for property and equipment-12,650.8Payments for property and equipment are related to business investment. Proceeds from disposal of property and equipment674.0Proceeds from disposal of property and equipment are positive cash inflows. They will be net against payments for long-term assets.Proceeds from disposal of international operations, net 139.7Proceeds from disposal of international operations only occurred once in the last 6 years, in 2009. It is uncertain when such an inflow will occur again in the future. However the average amount over the past 6 years is immaterial. Therefore the cash inflow will be net against expenditure on long-term assets. Investments and business acquisitions, net -942.8Payments for investments and business acquisitions are related to business investment. Other investing activities 101.2It is uncertain whether other investing activities concern business reinvestment activities. However as they are not material values (average: 101.2/12,678.8 = 0.008) it will assumed that they relate to capital expenditure. Net cash provided by investing activities-12,678.8An average of the reinvestment costs over the last 6 years will be used to smoothen out fluctuations. This gives an adjustment of -12,678.8 to the operating cash flows.

1. AdjustmentReinvestment in businessJan-14Jan-13Jan-12Jan-11Jan-10Jan-09Debt interest expense2,072.01,977.02,034.01,928.01,787.01,896.0Capital lease obligations263.0272.0286.0277.0278.0288.0Total interest expense2,335.02,249.02,320.02,205.02,065.02,184.0Interest income-119.0-186.0-161.0-201.0-181.0-284.0Net interest expense2,216.02,063.02,159.02,004.01,884.01,900.0Earnings before tax24,656.025,662.024,332.023,538.022,118.020,867.0Income taxes8,105.07,958.07,924.07,579.07,156.07,133.0Tax rate0.30.30.30.30.30.3After-tax interest expense1,487.51,423.21,455.91,358.71,274.51,250.5Example: calculation of Jan-14 tax rateTax rate = 8,105/24,656= 0.3287

Example: calculation of Jan-14 after-tax interest expenseAfter-tax interest expense = 2,216*(1-0.3) = 1,487.5Source: Walmart 2014 Annual Report and Walmart 2011 Annual Report2. AdjustmentPayment to capital providersCalculation of free cash flowsJan-14Jan-13Jan-12Jan-11Jan-10Jan-09Operating CF: as reported23,257.025,591.024,255.023,643.026,249.023,147.0Average reinvestment-12,678.8-12,678.8-12,678.8-12,678.8-12,678.8-12,678.8After-tax interest expense1,487.51,423.21,455.91,358.71,274.51,250.5Free cash flows12,065.714,335.413,032.112,322.914,844.611,718.7Example: calculation of Jan-14 free cash flowsFree cash flow= OCF average reinvestment + after-tax interest expense= 23,257 12,678.8 + 1,487.5= 12,065.7Free cash flow calculationLong Term Growth Rate

2.64% as of 2nd July 2014Source: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldShort-Term Growth RateYear EndingFCFJan-0911,719Jan-1014,845Jan-1112,323Jan-1213,032Jan-1314,335Jan-1412,066FCF has declined in Jan 2014 because of investing activities carried out by Walmart

FCF is computed after deducting Investing activities from Net Income to get FCF

Net Income Growth Rate is a better indicator of the Walmarts Short Term Growth Rate. Short-Term Growth Rate = Net Income Growth Rate = 3.67%Enterprise ValueThe Present Value of the firms future anticipated free cash flowsA measure of a company's value, often used as an alternative to straightforward market capitalizationEnterprise value is calculated as market cap plus debt, minority interest

Taken from the Jan 2014 FCF Long Term Growth Rate is obtained from the US Dept of Treasury (10 Year)Constant Growth ModelConstant Growth ModelFCF 012,066Growth Rate2.64%FCF 112384.3WACC6.05%Constant Growth Model363,175Debt49,441Equity Value313,734Total Enterprise Value = $377,269,000,0002- Stage ModelThe FCF Growth Rate from Year 1 till 4 is 3.67% ( Net Income Growth Rate)Net IncomeJan 09 13,381.00Jan 10 14,370.00Jan 11 16,389.00Jan 12 15,699.00Jan 13 16,999.00Jan 14 16,022.00Net Income Growth Rate = 3.67%2-Stage ModelYearFCF GrowthFCFTV012,065.713.67%12,508.523.67%12,967.633.67%13,443.543.67%13,936.9419,49652.64%14,304.8PV(FCF1 - FCF4)45,615.1PV(TV)331,653.9Total Enterprise Value377,269Debt49,441Equity Value327,828ConclusionThe valuations from the constant-growth model and the 2-stage model were $363,175 M and $377,269 M respectively.This is higher than the current enterprise value ($293,320 M) as estimated by Yahoo Finance.This is probably due to the fact that the short-term growth rate of Walmarts free cash flows was estimated to exceed the U.S. inflation rate.