Don’t Buy Walmart

Valuation Numbers

DCF: If I go by their DCF, the fair value is around $90. This assumes a growth rate of 5.8% and discount rate of 6.6%.

source: Old School Value

Note how the current price of $94.54 has an expected growth rate of 6.5%.

One question you should ask yourself is whether Walmart can growth their FCF by more than 6.5% in the future. If yes, Walmart’s value will go up higher. If no, Walmart’s value will deteriorate.

Here’s a better look at how the stock price and DCF has matched up over the years.

Fair value is around $90.

Earnings Based: While I like to use a DCF on Walmart due to their consistency in FCF, another angle is to look at their earnings.

I’m using an EPS on the lower end. The company is guiding between $4.90 to $5.05 and their growth rate has been around 7-9%. It’s not often you see Walmart take a loss, but they took a loss in their sale of Walmart Brazil and their investment in JD.com.

The Walmart Brazil sale is a one-time event, while JD.com could continue to go down.

Taking this into consideration, the market is expecting 8% growth from the current stock price at an EPS of $.490.

Fair value is in the low $90’s.

EBIT Multiples Based: One more angle. This one using a multiple of EBIT to figure out where WMT lies on the value range.

If I take some time to reconstruct the income statement to look up a conservative, normal and aggressive EBIT multiple, it looks something like this.

(Click on image to enlarge)

Historically, Walmart was priced at 10x EBIT. With the push to ecommerce, their multiple has expanded to 13x as of now. Whether that is new norm is yet to be proven.

I don’t want to push my luck and say Walmart is worth more than 15x EBIT.

The normal case is in the high $80’s.

Looking at the value in three angles, the valuations come out close enough to get an understanding that Walmart is fairly priced at the moment.

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Disclosure: Long WMT.

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Comments

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Mike Nolan 1 year ago Member's comment

Thank you for this insight into being a seller on Walmart, as this was an area I was not familiar. But I can tell you that as a customer, Walmart is ages behind Amazon and other competitors.

Why can I get an item from Amazon in 1 to days, but on Walmart.com it can take a week or more? Why if I want to do an instore pickup, do they waste time and money to ship the item my local Walmart, when I know for a fact it's in the store already? That makes no sense.

Compare this with BestBuy. I place an order online. Within 30 minutes I'm told I can go pick it up. In under 3 minutes I am in and out of the store. I placed a similar order at Walmart. It took a week to arrive (even though it was also sold in store). Then it took an hour and half to pick it up. Why? There was no one manning the pick up counter. Even after having customer service announce over the PA system for someone multuple times, no one showed up. When someone finally did, the person didn't know how to process it. When someone finally arrived who could, they went to the warehouse for a very very long time. When I asked why, she said they had to manually scan with her eyes for my name on every box till she found it. That there was no rhyme or reason to how it was scanned. When the item was finally handed to me, the box was badly damaged as was the item inside.

This is anything but efficient! Bullish on $AMZN and $BBY, Bearish on $WMT.

James Hunter 1 year ago Member's comment

#Walmart is, and always has been, a mess.

Angry Old Lady 1 year ago Member's comment

Don't you mean you see how much money WALMART is leaking compared to the efficiency of Amazon? You wrote it the other way around.

Dick Kaplan 1 year ago Member's comment

No, he meant what he wrote. I too did a doubletake as I though Amazon was the king of efficiency, while as James son eloquentlg put it, I always though Walmart was a "mess."