Security Analysis: WMT
Group 2
Team Members:
Inez Boundurant
Jessica Cannon
Kelly Gibbons
Casey Graves
Ali Nasser
I.
Report Date
S & P Value
Last Price
Intrinsic
Value
11/29/2010
1,187.76
$53.85
60.93
Economic
Moat
Wide
Recommendation
Hold
The Theme
Wal-Mart was built to save people money so they can live better. Hints to their slogan:
“Save Money. Live Better.” Their mission has allowed the company to grow around the world.
The culture and the values of their employees help strive for success of Wal-Mart while serving
over 200 million customers and members each week(Wal-Mart Annual). We strongly believe
that Wal-Mart is the best- positioned global retailer and that they will continue to progress. Cost
leadership is the corner stone of how Wal-Mart goes to market.
Doing our analysis of Wal-Mart Stores, Inc., we gathered our information and different
figures from the Hoover’s online through the Willis library’s website, Reuters.com, and
Morningstar.com databases which gave us insight to several financial aspects of the firm,
including its stock, cash flows, risk, dividends, sales, earnings, debt, and overall performance.
II.
Business Analysis
Profile of the company
“If we work together, we’ll lower the cost of living for everyone…we’ll give the world
an opportunity to see what it’s like to save and have a better life.” Wal-Mart founder, Sam
Walton, summarized his vision back in 1962 for a new type of discount store that consumers
would appreciate. As an owner of a much smaller discount store Walton had the experience, did
the research, and then put up 95 percent of the startup costs for his new company in which he and
2
his wife truly believed in. The first store opened in Rogers, Arkansas and was incorporated as
Wal-Mart Stores, Inc., on Oct. 31, 1969(Wal-Mart Corporate).
The 1970’s and 1980‘s marked a period of rapid growth of the company. Wal-Mart had
38 stores in 5 states and 1,500 associates with sales of $44.2 million in less than a decade after
opening. In the 70’s Wal-Mart had two 100 percent stock splits and expanded with the first
distribution center being built in Bentonville, Arkansas. By the end of the 70’s Wal-Mart had
became the first company to reach $1 billion in sales in such a short period of time by
completing feats unheard of in that era. In 1983 Wal-Mart experienced a 100 percent stock split
for the sixth time with a market price of $81.625; that same year a brand extension of the
company was launched called Sam’s Club. Such success allowed them to purchase 16 MohrValue stores, Hutcheson Shoe Company, 92 Kuhn’s Big K stores, U.S. Woolco Stores, and many
more. The expansion allowed for Wal-Mart to give variety to its name and add a full service auto
center, pharmacy, 1-hr photo and jewelry store. Two more stock splits later and the company was
in 29 states, with 1,198 stores, 200,000 employees and sales of $15.9 billion. From 1975 to 1983,
Forbes magazine ranked Wal-Mart No. 1 among general retailers (Wal-Mart Corporate).
The 1990’s saw Wal-Mart open international stores in Mexico City, Canada and expand
into all 50 US states by 1995. Sam’s Choice brand items was introduced by Wal-Mart and sold
successfully in Sam’s Clubs stores.. The company also had the ninth, tenth and eleventh 100
percent stock split allowing Wal-Mart to replace Woolworth on the Dow Jones Industrial
Average. The 2000’s were marked with dozens of awards and achievements by Wal-Mart
including recognitions of accomplishments in diversity, sustainability, patriotism, charity efforts,
philanthropy and many more (Wal-Mart Corporate).
3
Today, Wal-Mart still serves customers and members with the philosophy to “Save
Money, Live Better”. Sales have reached an astonishing $405 billion with the help of more than
2 million employees here in the US and in 15 other countries. Currently there are more than
8,650 Wal-Mart retail units and the company is expanding every day (Wal-Mart Corporate).
Macroeconomics and industry analysis
Compared to competitors in its industry, Wal-Mart has a business model that has made it
dominant. Wal-Mart beat out their competitors, mainly smaller businesses by offering wider
varieties of products at more competitive prices. This is a very simple business tactic, if you want
to sell a lot of something cut your profit margin to beat the other competitors and you will sell
more. It leads other firms in market capitalization by a wide margin. According to Yahoo!
Finance, Wal-Mart leads its closest competitor, Target, by over 100 billion dollars in market
capitalization due to its aggressive business model (Yahoo!). Statistics do show that Target is
closing the gap on Wal-Mart. Recently Target prices were shown to be only four percent above
Wal-Mart, compared to 14 percent above it two years before. Another major competitor, Kroger,
has closed the gap with Wal-Mart, by finding efficient ways to lower their prices. Many other
competitors in the industry are finding ways to do the same, but none have the power of WalMart to cut out the middlemen and shift costs and risks onto the manufacturer (Forbes). Also
according to Forbes other companies have failed to keep up with Wal-Mart because Wal-Mart
has always been in the fore front of warehousing, distribution and trucking in-house. Compared
with other firms in its industry Wal-Mart has kept the competitive advantage by also leading and
setting standards with technology advances. It gathers retail information through high-tech
4
barcode and product-tracking software, and revolutionized the relationship between merchant
and vendor (Forbes).
Analysis of the company and the prospects of its major products and services
Wal-Mart is a common stop among many households because of its convenience to
consumers; it is the largest retailer in the United States and is gaining ground internationally. The
firm is divided into three segments: Wal-Mart U.S. (63% of revenue, 3,700 stores), international
(24%, 4,100), and Sam's Club (12%, 600). Wal-Mart U.S. revenue consists primarily of grocery
(49% of revenue), entertainment goods (13%), and hard lines (12%). The firm's various store
formats are known around the world for providing a wide variety of consumer needs at low
prices (http://www.morningstar.com). Wal-Mart has become a necessity in many homes and is
added to a list of routine activities that isn't given a second thought. Sam Walton had many local
successful businesses prior to opening the first Wal-Mart in 1962. Within a few years Wal-Mart
became successful and expanded internationally (Wal-Mart Annual).
Wal-Mart is looking at the future by focusing on three points: growth, leverage, and
returns (Wal-Mart Annual).

Growth: Domestically, Wal-Mart is planning to expand into metropolitan areas;
internationally, they are expanding by purchasing internationally brands.

Leverage: Wal-Mart is focusing on cutting their expenses at a rate that exceeds revenue
growth so income will grow faster than revenues.

Returns: Wal-Mart is looking to attract more investors and have a better chance to
improve their investments.
5
III.
Financial Analysis
Common Size Analysis
%
2006
Revenues
Cost of Goods Sold
Gross Profit
Other
Income/Expenses
Taxable Income
2008
of
Sales
2009
of
Sales
2010
of
Sales
$315,654
100.0%
$348,650
100.0%
$378,799
100.0%
$405,607
100.0%
$408,214
100.0%
240391
76.2%
264152
75.8%
$75,263
23.8%
$84,498
24.2%
56,733
$18,530
Tax Expense
5,803
$11,231
18.0%
5.9%
0.4%
5.5%
1.8%
3.6%
Inc./Loss from Disc.
Oper (net)
Other
64,001
$20,497
1,529
$18,968
6,365
$12,178
(894)
$11,231
Earnings per Share
%
of
Sales
$17,358
Net Income
%
2007
1,172
Income After Taxes
%
of
Sales
Operating Expenses
Operating Income
%
$2.68
3.6%
$11,284
18.4%
5.9%
0.4%
286,515
$92,284
70,288
$21,996
1,798
5.4%
$20,198
1.8%
6,908
$13,290
3.5%
-0.3%
3.2%
(153)
$12,731
$2.71
$3.13
75.6%
24.4%
18.6%
5.8%
0.5%
5.3%
1.8%
3.5%
0.0%
3.4%
306,158
$99,449
76,651
$22,798
1,900
$20,898
7,145
$13,753
146
$13,400
$3.39
75.5%
24.5%
18.9%
5.6%
0.5%
5.2%
1.8%
3.4%
0.0%
3.3%
304,657
$103,557
79,607
$23,950
(1,884)
$22,066
7,139
$14,927
(79)
(513)
$14,335
$3.70
We began our analysis by performing a common size analysis presents each component
of the income statement as it relates to one dollar of revenue. This allows us to compare years
where there are different sizes of revenue. When performing a common size analysis upon WalMart’s income statement, we realized that the income growth is due almost completely to growth
of sales. Their gross margins and operating margins have remained the same, showing no
increase in efficiency over the past years.
6
74.6%
25.4%
19.5%
5.9%
-0.5%
5.4%
1.7%
3.7%
0.0%
-0.1%
3.5%
Revenue Trend Analysis
600000
500000
in Billions
400000
300000
200000
100000
0
2006
2007
2008
2009
2010
2011
Year
2012
2013
2014
2015
Proforma Income Statement
2006
Revenues
$315,654
Growth
0%
Cost of Goods
Sold
Gross Profit
240391
Gross Margin
Operating
Expenses
Operating Income
Operating Margin
Other
Income/Expenses
Taxable Income
Tax Expense
$75,263
23.84%
2007
2008
2009
2010
2011
2012
2013
$348,650
$378,799
$405,607
$408,214
$435,319
$464,225
$495,049
10.45%
8.65%
7.08%
0.64%
6.64%
6.64%
6.64%
6.64%
286,515
306,158
304,657
328,642
350,463
373,734
398,550
$99,449
$103,557
$106,678
$113,761
$121,315
$129,370
$137,960
25.37%
24.51%
24.51%
24.51%
24.51%
24.51%
264152
$84,498
24.24%
$92,284
24.36%
24.52%
56,733
$18,530
5.87%
1,172
$17,358
86,819
92,584
2014
$527,920
98,731
2015
$562,974
6.64%
425,014
105,287
64,001
$20,497
70,288
$21,996
76,651
$22,798
79,607
$23,950
81,413
$25,265
$26,942
$28,731
$30,639
$32,674
5.88%
5.81%
5.62%
5.87%
5.80%
5.80%
5.80%
5.80%
5.80%
1,284
1,369
1,529
$18,968
1,798
$20,198
1,900
$20,898
(1,884)
$22,066
1,058
$23,323
1,129
$24,872
1,204
$26,523
$28,284
$30,162
7,821
8,340
8,894
9,484
10,114
7,139
$14,927
$15,327
$16,345
$17,430
$18,587
$19,821
5,803
6,908
6,365
$12,178
$13,290
7,145
$13,753
(894)
(153)
146
(79)
(230)
(245)
(261)
(279)
Income After
Taxes
Inc./Loss from
Disc. Oper (net)
Other
$11,231
Net Income
$11,231
$11,284
$12,731
$13,400
(513)
$14,335
$14,765
$15,745
$16,791
$17,905
$19,094
3.56%
3.24%
3.36%
3.30%
3.51%
3.39%
3.39%
3.39%
3.39%
3.39%
$2.68
$2.7
1
$3.13
$3.39
$3.70
$3.84
$3.99
$4.14
$4.30
$4.46
Income Growth
Earnings per
Share
(297)
7
Looking at the growth trend over the past years, we can predict that the growth will
continue for at least the next five years. We have come up with a forward growth rate of 6.64%.
Combining this forward growth rate and the data from the common size analysis we were able to
predict the income for the next five years. The sustainable growth rate for Wal-Mart is 15.9%,
this indicates that Wal-Mart is under performing and is not utilizing their resources. This rate is a
rate where Wal-Mart “can be”, where they can sustain.
Capital Market Analysis
P/E Ratio (TTM)
Dividend Yield
Payout Ratio
Price to Sales Ratio
Price to Earnings Ratio
Price to Cash Flow Ratio
Market
COST
Wal-Mart
TGT
Industry
17
1.68
36.03
3.54
25.97
22.03
23.04
1.4
26.4
.38
23.04
10.79
13.23
2
29.03
.49
13.25
7.74
15.63
1.3
20.0
.64
15.63
7.52
20.09
1.47
18.19
.52
15.08
8.31
(Hoover’s)
The Price Earnings (P/E) Ratio indicates that Wal-Mart is less risky compared to the
market and industry. Although Wal-Mart is considered a low P/E, a lack of confidence or
overlooked stock by the market could result in the low comparison. The dividend yield shows
how much a firm pays out in dividends each year relative to its share price, and in this case, WalMart pays higher dividends giving the investors a better investment for their dollar, in other
words, a “bang for your buck.” The Payout Ratio for Wal-Mart we believe is a healthy position
due to the low economy during these past years. This also means that Wal-Mart has retained
about 70% of its earnings which is understandable since they have been investing heavily in
expanding and restructuring their operations domestically and globally. The Price to Sales Ratio
measures the price of the stock as it relates to the firm’s sales; for example, for each dollar of
sales the investor pays $0.49 for Wal-Mart’s stock. According to the price to earnings ratio, we
8
can see that for each dollar of earnings the investor pays $13.25 for the firm’s stock. We can also
conclude that the payback period for the investment is around 13 years; after 13 years,
everything is profit. The industry and market’s ratio result in a more expensive and riskier
investment. The price to cash flow ratio measures the ability of the firm to bring in cash and
since Wal-Mart’s ratio is lower, it is considered a better investment because for each dollar of
cash the investor pays $7.74 for the firm’s stock. With this ratio, the payback period is less than
8 years; after 8 years, you would receive all profit in return.
Liquidity Analysis
Market
Costco
Wal-Mart
Target
Industry
1.33
.82
1.16
.60
.87
.28
1.63
.80
1.06
.53
Current Ratio
Quick Ratio
(Hoover’s)
The current ratio is calculated by dividing the current assets by the current liabilities
which measures the ability to pay for the firm’s obligations. Here, for each dollar of current
liability, Wal-Mart has $0.87 of current assets. Compared to the industry and the market, WalMart is more likely able to pay off its debt. The quick ratio is used when inventory is slow to sell,
using current assets (minus inventory) and dividing it by current liabilities, in order to measure
the ability to pay our obligations using only current assets that can be made liquid quickly.
Profitability Analysis
Gross Margin
Net Profit Margin
Return on Assets
Return on Equity
Return on Investment
Earnings per Share
Market
Costco
Wal-Mart
Target
Industry
32.03
5.53
1.50
10.10
12.77
1.67
5.70
12.00
10.30
2.92
25.37
3.51
8.58
21.00
13.1
3.70
30.26
3.81
5.60
17.10
7.70
3.30
18.02
3.31
7.70
19.60
(Hoover’s)
9
The margin of net profit shows how much of each dollar earned by the company is
translated into profits. Lower profit margins, Wal-Mart in this case, represent a pricing strategy.
Wal-Mart has made “fortunes” for its shareholders while operating on net margins less than 5%
annually. The return on assets ratio (ROA) gives an idea as to how efficient management is at
using its assets to generate earnings. The higher the ROA ratio, the better, because the firm is
earning more money on less investment; therefore, Wal-Mart is a good investment. Comparing
Wal-Mart to its top competitors, we see that Wal-Mart is the only one that is higher than
industry. Next looking at return on equity, we see that in the trailing twelve month numbers,
Wal-Mart’s overall performance is considered superior compared to the industry, market and to
its nearest competitors, Costco and Target. Additionally, Wal-Mart performed especially well in
profit, assets utilization, and risk management. (See DuPoint model) Wal-Mart’s gross margin of
25.37 is strong compared to the average of the industry but its closest competitor Target’s is
higher. This could be due to a difference in their pricing strategies.
Activity Analysis
Asset Turnover
Accounts Receivable Turnover
Inventory Turnover
Market
Costco
Wal-Mart
Target
Industry
.30
3.40
90.70
12.30
2.44
101.43
9
1.50
8.70
6.60
2.30
251.1
8.6
(Hoover’s)
The asset turnover ratio measures the ability of the firm to manage its assets in order to
produce sales. We can see that Wal-Mart is producing more sales with its assets as it compares to
the industry and the market; more productivity is better. As we can see, Costco is slightly better
at managing its assets while Target is almost 1% below the industry average. This ratio is useful
to determine the amount of sales that are generated from each dollar of sales. Companies with
low profit margins tend to have high asset turnovers (Wal-Mart) but companies with high profit
10
margins have a low asset turnover. The accounts receivable turnover ratio measures how
effectively a firm uses its assets. Wal-Mart has a lower accounts receivable turnover compared to
the industry. A high ratio indicates that the company operates on a cash basis or that its extension
of credit and collection of accounts receivable is efficient. A low ratio indicates the company
should reevaluate its credit policies (Investopedia). When you compare Wal-Mart to industry we
see that Wal-Mart is not handling receivables as well as the industry, but they are better than
their top competitors, particularly Target who has issues in the area. The inventory turnover ratio
shows how many times a company’s inventory is sold and replaced over a period. A low
turnover implies poor sales and excess inventory when a high ratio implies strong sales or
ineffective buying. Wal-Mart and Costco is successful at turning over their inventory efficiently.
Solvency Analysis
Market
Costco
Wal-Mart
Target
Industry
Leverage Ratio
Debt Ratio
Long-Term Debt to Equity
7.13
58
126.99
2.20
19.80
19.77
2.41
51.5
67
2.90
98.50
105.38
2.43
36
48.56
(Hoover’s)
The leverage ratio measures the ability to pay back principal; the higher the ratio the
more volatile and a higher chance to apply for bankruptcy, the lower the ratio the more
conservative and less volatile. Here we can conclude that Wal-Mart is better compared to the
industry and the market, making it a better choice for investors. Investors look at the debt ratio
very closely because it compares the debt to their investment – for each dollar of equity there is
$0.35 of Wal-Mart’s debt. Keeping the industry and market in mind, Wal-Mart has a lower ratio
which in this case makes Wal-Mart a good investment. At long – term debt ratio, Wal-Mart has
more debt as it relates to equity than the industry but less than the market. This shows two
things: 1) Wal-Mart is investing which indicates they are investing large amounts and 2)
11
compared to the market, the market is in much more need of financing due to the down fall of the
economy. It is worth noting that this is at a low financing cost, as interests are tax deductible.
DuPoint ROE
NPM
TAT
EM
ROE
Market
Cost Co.
Wal-Mart
Target
Industry
5.53%
1.67%
3.54%
3.81%
3.31%
.30
3.4
2.4
1.5
2.3
2.37
1.20
1.53
2.10
1.57
.0393
.0681
.13
.12
.1195
Comparing each of the components to the ROE of the firm with that of the industry, we
can conclude that the company, with a higher NPM is more efficient in managing for profit than
the industry; it is generating higher net income per dollar of sales. The same happened with the
TAT, having the firm’s ratio higher than that of the industry; this shows that the firm is doing
better in managing its assets where it’s generating higher sales per dollar of assets. Finally, the
EM, the last component, is lower for the firm than that of the industry; this shows that the firm
utilizes debt less than the industry which is good. The ROE which combines all three
components shows the overall performance of both the firm and industry where as expected, the
firm performed better than the industry as a whole. This just confirms that Wal-Mart is more
profitable, manages their assets better in generating sales, and is doing good in managing sales.
In additionally, comparing Wal-Mart to Cost Co and Target, Wal-Mart is not the most efficient
in some areas but in the DuPoint, Wal-Mart shows an overall good performance compared to
these two competitors.
Summary Opinion
12
We conclude that Wal-Mart’s stock was lower in price and therefore, less risky which is
better for the investors. We could also see that the firm was more successful at bringing in cash
flow than the industry and the market, and has a higher dividend yield; all of this being good
news to investors as well. In addition, Wal-Mart’s numbers showed a better utilization of assets
and resources which can be translated into capturing more of the market share and of course
promoting a better image; we are gaining customers and improving our image. We can confirm
this with the higher earnings per share (EPS) growth rates.
Wal-Mart has been investing heavily in expanding its operations, domestically and
globally. The company has been working hard in the restructuring of its U.S. organization,
creating new divisions to better handle its global operations, consolidating some of its functions,
strategically closing existing stores and opening new ones, working to improve their private
label, acquiring and negotiating deals with new product lines, changing its packaging and
labeling, and becoming more environmental, expanding its products and services in its virtual
store, redid its logo, and more. This of course, with the intent of becoming better than it is
already, it is more profitable for its shareholders.
Finally, Wal-Mart has less debt as it relates to equity than the industry and the market,
which means they are using mostly their own resources and borrowing less than others. When
they do borrow, they do so at a low financing cost as interest are tax deductible.
IV.
Stock Valuation
The next step in evaluating Wal-Mart as an investment opportunity is to determine the
intrinsic value of their stock.
13
We will first look at Wal-Mart as it compares to other companies within the industry and
to the industry average. The most common means of comparing companies within an industry is
using the Price to Earnings (P/E) ratio. We will compare Wal-Mart’s P/E ratio to two of its
P/E ratios: Discount, variety Stores
Price to Earnings
23
20.09
13.81
WMT
14.9
TGT
COST
Industry
competitors, Target and Costco’s.
(MorningStar)
Figure 1 P/E ratio chart
14
For this chart we can see that Wal-Mart is lagging behind both its two main competitors and the
industry as a whole. This could be an indication that Wal-Mart is priced lower than other
companies within the industry. The above analysis is very subjective and based on how WalMart is perceived by investors when compared within the discount store industry.
We will next determine the intrinsic value of the stock using the dividend discount
model. We have decided to use a multi-stage model to evaluate Wal-Mart’s stock. Our financial
analysis of Wal-Mart show that they are in a period of aggressive growth, they are growing at a
rate of 3.81% per year with a dividend growth rate of 15%. Our projections for the future show
this trend continuing for at least 5 more years. Historically periods of high growth do not last
more than 5 years. We believe that after 5 years Wal-Mart will still be growing, but believe that
the growth rate will begin to slow. We will use a 3 stage model with a second two year dividend
growth stage of 7% before settling into a permanent dividend growth rate of 3%.
After we determined what growth rates to use, we had to choose a discount rate. We
looked into using the CAPM model but felt that it was problematic in this instance. We believe
that Wal-Mart’s very low beta does not fully measure the risks that investors face. We have
chosen instead to use a discount rate of 6.5%. This rate is still much lower than average, but
better indicates the risks inherent in the industry and those risks created by our current economy.
The following chart illustrates the values we used to determine the intrinsic value of WalMart’s stock.
Stock
WMT
growth rate of first stage(g1)
15%
number of years for first stage
5
Growth rate of second stage(g2)
7%
number of years for second stage
3
Permanent growth rate after second stage(g3)
3%
discount rate (k)
6.5%
15
Figure 2 Values used in 3 stage dividend growth model
Scheduling out the cash flows from dividends for each year within the super growth period, and
then determining the cash flow from the permanent growth stage using the constant growth
model
Year
Dividends
Terminal Value
Present Value of dividends
Cumulative Present value of dividends
Present Value of Terminal value
Intrinsic Value (P0)
$
0
1.21 $
1
1.39 $
2
1.60 $
3
1.84 $
4
2.12 $
5
2.44 $
6
2.62 $
$
1.31 $
1.41 $
1.53 $
1.65 $
1.78 $
1.79 $
$
$
7.68
53.24
$
60.93
7
2.80 $
$
1.80 $
8
9
2.99 $ 3.08
88.12
1.81
Figure 3 3_stage growth model calculations
We determined that the intrinsic value of Wal-Mart’s stock is $60.93. When we compare this
value with market value of $53.35, we believe that Wal-Mart’s stock is slightly undervalued.
V.
Bulls vs. Bears
For those who do not spend a lot of time on Wall Street, bulls and bears is a simple but
essential concept that refers to opposite trends in the stock market. According to
InvestorWords.com, a bull market is "a prolonged period in which investment prices rise faster
than their historical average." Conversely, a bear market means "a prolonged period in which
investment prices fall, accompanied by widespread pessimism." So, in short bulls mean good,
and bears mean bad (Yahoo!). When an investor is looking to buy in the stock market they tend
to analyze the trend the company is showing and look for a positive trend. They focus on the
consistency of the company and look at the history of the stock. Stocks depend on the
relationship between the buyer and the seller. Both parties analyze the trends of that company in
16
the stock market. Based on the trends, buyers and sellers form their opinion. There are a few
basic concepts in understanding when to buy and when to sell stocks. Ideally the buyer is
interested in purchasing stocks when the price isn’t high; the seller thrives when the stock is sold
at an all time high price. This doesn’t mean there are no other conditions in which a buyer would
be interested in stocks; stocks are purchased when there is personal gain whether it is an easy
investment or a higher rate of return. The seller sells the stocks when the stocks have reached a
high peak in the stock market and buyers interested in that stock purchase it in hopes that the
trends stay constant and the stock prices continue to peak.
After researching Wal-Mart and analyzing their stock, it’s obvious that the stock will
have impact from bulls and bears under many different conditions.
BULLS:

Wal-Mart is the most famous and biggest in the retail store in the world. It is
well known by the majority of the United States, and a common household stop.

Wal-Mart is a bargain; consumers get the best value for their money.

Wal-Mart is not only a national success but has expanded internationally with
stores in South America, Europe, and Africa. Wal-Mart international is in15
countries outside of the United States.

Overall reputation of Wal-Mart is good with many awards and a stable business
history.
BEARS:

Wal-Mart is a monster in the retail industry and it doesn't allow small businesses
to flourish.
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
Wal-Mart is a bargain that provides for all types of consumers, but there are rival
companies such as Target, which advertises high quality products.

From an environmental point of view Wal-Mart has continued to grow and use
natural resources but does very little to fund them back to the Environment.
VI.
The Moat
Wal-Mart definitely has a cost advantage moat because of its ability to acquire products
at a lower price than its competition, therefore allowing them to sell it to the consumer for a price
that other firms cannot match. The reason Wal-Mart has such a wide moat over other firms it
competes with is because “it would take decades of successful expansion for any firm to match
Wal-Mart's tremendous size and scale,” (Investopedia). Wal-Mart’s scale lets them control their
purchasing from suppliers which makes them more effective (Morningstar). This allows WalMart to create low prices which easily hurt and sometimes put competitors out of the market.
Wal-Mart's huge market capitalization was a result of its cost controls and low price advantage
over competing firms. According to Chris Gallant of Investopedia, “Competition cannot easily
recreate the brand recognition, economies of scale and technical marvel that is Wal-Mart's
distribution network.” This moat has allowed Wal-Mart to produce huge profits making it the
envy of competing smaller businesses. We believe Wal-Mart’s ability to sustain this moat
forever is not likely because other firms such as biggest competitor Target, have figured out
ways to somewhat duplicate Wal-Mart’s cost effectiveness model.
VII.
Risk
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There are several areas of risk that an investor should consider before buying stock in WalMart. One area of risk is public perception. Wal-Mart has had negative publicity in the past about
their employment practices, as well as their impact on the economic well being of markets to
which they are new entrants. Do to this publicity some people choose not to do business with
Wal-Mart. As the discount store industry becomes more completive, this image problem could
translate to loss of sales to competitors.
Another risk facing Wal-Mart investors is their litigation problems. Wal-Mart is facing
several lawsuits. If Wal-Mart loses any of these lawsuits it would create a liability and impact
their net profits.
Wal-Mart, because of their size, has been able to demand concessions from venders that
are in part how they keep their prices low. There is a risk that this tactic could backfire on them.
Vendors could become alienated and as new pipelines for their products become available, they
could choose to stop doing business with Wal-Mart. If a large enough number of suppliers leave
it could ultimately impact Wal-Mart’s sales.
Wal-Mart is at this time dependent on international expansion for their growth.
International business is risky for any company. Whenever a company does business
internationally there is always the risk of running afoul of international laws or politics. There is
also the risk of misunderstandings do to cultural differences in the new markets.
The last major risk that investors should consider when looking at Wal-Mart is their
increased diversification. This includes both the entering of new markets, and offering new
services. If a company is not careful, they can end up focusing too much effort on the new
services, and allow their core business to erode. The other fear is that they will not have enough
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understanding of the new business/service, and losses caused by this lack of knowledge will eat
into their bottom lines.
VIII.
Investing Strategy
As an investor, we recommend that current investors hold but do not recommend buying
more stock. For those investors that do not currently own Wal-Mart stock we would recommend
buying the stock, while the intrinsic value of the stock is only 12% under the current sales price,
the strength of the company makes it an attractive long term investment. If Wal-Mart’s stock
goes up more than $10 within the next year we suggest no longer buying the stock. We do not
recommend Wal-Mart as a day trade stock
IX.
Notes:
9/28/2010
Wal-Mart bids to purchase South African retail chain Massmart, allowing for
expansion into Africa
9/29/2010
South African labor unions oppose Wal-Mart’s purchase of Massmart.
9/29/2010
Wal-Mart gets a new chief financial officer, Charles Holley. He was promoted
from treasurer and executive vice president.
10/12/2010 Wal-Mart announced that they will partner with Apple to sell the iPad.
10/19/2010 Wal-Mart issued $5 million bond offering. This bond offering has lowest interest
of any 3 to 5 year bond offering on record.
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10/21/2010 Wal-Mart announced that they will partner with Barnes and Nobles to market the
Nook e-reader.
11/1/2010
Wal-Mart announced that they would publish their first every Christmas toy
catalog and companion website.
11/29/2010 Wal-Mart completes bid for South Africa based Massmart, for 51% of shares at
the price of $2.32 billion. (Opposed to purchasing the whole company at $4.25
billion)
The Wall Street Journal
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Investopedia. Investopedia ULC 2010. Web. 13 Oct. 2010.
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InvestorWords.com. Web Financial Inc. 2010. Web. 15 Oct. 2010
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MSN. Thomson Reuters 2010. Web. 18 Oct. 2010.
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