My DCF analysis is as given on the left. Please note I have used 2011 free cash flow (fcf). fcf has been growing at 8.9% over the last 5 years. I am projecting that this pace continues for the next 10 years and then falls to 4%.
I have used a discount rate of 8% with respect to WMT's consistency of earning and solid balance sheet.
This gives a fcf capitalized value of ~62. To this we should add the tangible book value ($15.3) to properly value WMT.
This would give us a final value of $77.42.
Now if wmt was to trade at a median price/earnings or price/sales multiple over 5 years we would get a value of between $64 to $72. This slightly below but consistent with the value derived above.
WMT medpe,medps Interactive Chart
Walmart is trading at just above historic 10 year multiple, as shown in the chart below.
Thus, I feel that WMT is undervalued and has a upside of 15% from current prices.
Also don't forget the earnings and fcf continues to grow like clockwork and WMT has paid a rising dividend. Current yeild is 2.4% with a payout ratio of 32%. Dividend has been rising at the rate of 15% per year and given the payout can keep on rising at faster level than earnings for at least a decade. This mean a share bought at current price will yield 9.43% in 2022 if current pace of dividend increases continue.
Overall I think Wal-mart remains a buy with my target price in the low 70's. I would welcome any comments below.
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