Looking Into WAL-MART The Company Every week, 100 million customers visit Wal-Mart stores worldwide, making

it the worlds largest retailers. A leader in the discount industry, Wal-Mart posted $218 billion in sales last year as it continued to specialize in selling discounted household goods. The company has 1.3 million employees working at 3,200 locations in the United States and 1,100 locations in Mexico, Puerto Rico, Canada, Argentina, Brazil, China, Korea, Germany, and the United Kingdom. Wal-Mart aims to instill its logo, Everyday Day Low Prices in each and every division. Currently the company is broken down into four divisions: Wal-Mart Supercenters, Discount Stores, Neighborhood Markets and SAMS Club Warehouses. The magnitude and global presence of Wal-Mart allows it to be a dominant player in the retailing market place. It is essential that fundamental relationships within the industry and the companys environment need to be analyzed in order to efficiently evaluate the correct market price for the companys stock (WMT (NYSE)). Industry Outlook Household products, retail drugs stores, and personal care segments are expected to produce above-average revenue growth and increase market share in the coming months. The uncertainty between the U.S. and global economies should not affect the sector because many of the products are basic necessities. The retail sector is expected to perform in line with the overall market in the next 6-12 months. Mega retailers such as Wal-Mart are expanding their product variety by focusing on groceries and pharmaceutical drugs. To combat the market intrusion, Walgreen, CVS and other drug stores are adding groceries to their shelves. The mass merchandising

industry is only getting bigger as the major players are offering more selections in order to gain a competitive edge. Many companies like Wal-Mart, Carrefour, Royal Ahold and Kroger are expanding by acquisitions. The industry is getting larger while the number of members is declining. Porters Five Forces Stable growth, expertise management, operating efficiency, and competitive pricing make Wal-Mart a strong company when assessed using Porters Five Forces Model. The model helps to evaluate the company by looking at the bargaining power of the suppliers and buyers, the threat of substitute products or services, the potential threat of new entrants and the rivalry among existing firms. Wal-Mart relies heavily on these 5 factors to ensure long lasting relations and customer satisfaction. Suppliers Wal-Mart, being a dominating customer to its suppliers, uses this as an advantage for them. The company is the largest customer to companies such as Kraft Foods, Gillette, and P&G. In order to maintain and satisfy Wal-Mart as a customer, suppliers are willing to provide favorable payment terms, discounts, and priority delivery dates. These mutual business relations are evident throughout Wal-Marts increasing success. Buyers Due to the fact that Wal-Mart is not monopolistic, the goods offered are substitutable by competing organizations. It is the size of its stores and the wide selection it carries daily, not to mention the quality emphasis it place on merchandises that allows it to rank high in customer preference. Contrary to belief, customers of Wal-Mart have bargaining power since Wal-Mart strives to satisfy its customers by matching the prices

of any of its competitors. As Wal-Marts growth and profitability have shown, customers are mostly satisfied with the chains low prices and convenient locations. Threat of New Entrants New entrants are always possible, but to seriously compete with Wal-Mart they will need enormous capital. The company is expanding rapidly leaving less room for new competitors. For the fiscal year ending 2004, the company plans to open 45 to 55 new discount stores and 200 to 210 new Supercenters domestically. Wal-Mart International plans to open and or expand 120-130 units in existing markets becoming a global phenomenon. With sales increasing at 12.3% in 2003, potential competitors to this market will have to act quickly and have a highly effective business model to enter the Wal-Mart dominated market. Competition Competition within the industry itself does not present a formidable threat to WalMart Inc. The company is larger and more profitable that the other few direct competitors, namely Target, K-Mart which faced bankruptcy, and Costco who competes with Wal-Marts SAMS Club division. Target represents the robust competitor for WalMart but unlike Wal-Mart, Target aims to sell upscale and trendier merchandise. With 1,494 stores owned by Target Corp. domestically, it does not present a major threat to Wal-Mart global stores, but fair competition to the domestic stores. In summary, WalMart is ahead of the competition and overall, the leader in the industry with a secure market position. Beyond the fundamentals of the companys position within the industry, financial ratios like the After tax profit, Return on Assets (ROA), Return on Equity (ROE) and

current quick ratio need to be derived. This is to determine a more accurate financial valuation of the company in comparison to the stock price. In addition, evaluating the financial ratios of Wal-Mart would be most pertinent in the provision of a fair stock valuation of the company. Profitability Ratios After-tax Profit Margin The After-tax profit margin is an income statement ratio. This ratio is formulated by dividing the annual net income by the annual sales revenue (turnover). This ratio simply reflects the profit margin a company obtains from its products and services. A high ratio does not necessarily mean that a company is performing well, as different industries have varying profit margins. However, within an industry this figure is more relevant. For instance, comparing two similar firms, a firm with a higher ratio will generally be more cost efficient, as it has extracted more profit then the other company. Net income/Sales (Dollar amounts in million) Industry Average = 3.48% (From http://yahoo.multexinvestor.com) 2003: 8,039/244,524=3.29% 2002: 6,671/217,799=3.06% 2001: 6,295/191,329=3.29% 2000: 5,337/165,013=3.23% 1999: 4,430/137,634=3.22% (From http://www.walmartstores.com) The five year average of After-tax profit margin for Wal-Mart is 3.22%. In comparison, the entire industry average is 3.48%. The primary reason Wal-Mart is slightly below the industry average is because Wal-Mart is a considered a low price retail store that keeps lower margins on its product. Its profitability strategy is to generate mass turnover to compensate for lower profit margins.

Return on Assets Return on assets (ROA) ratio is derived by dividing the annual Net income by the total asset value of the company. This ratio highlights the level of return the companys assets are providing and gives an indication of whether the assets are being utilized efficiently. A higher ratio shows more profitability from the assets owned and managed. Net income/Total assets (Dollar amounts in million) Industry Average= 8.48% (From http://yahoo.multexinvestor.com) 2003: 8,039/94,685=8.49% 2002: 6,671/83,527=7.99% 2001: 6,295/78,130=8.06% 2000: 5,337/70,349=7.59% 1999: 4,430/49,996=8.86% (From http://www.walmartstores.com) The five years average of ROA for the Wal-Mart is 8.20% where the industry ROA five year average is 8.48%. This ratio suggests that Wal-Mart is leveraging its assets not as effectively as some of its retailing competitors. From a valuation stance, this ratio is good and as it shows a high level of efficiency, but suggests they could be more efficient. Further, the 2003 figure is strong and shows continual strength of this ratio. Return on Equity The return on equity (ROE) ratio is the annual net income divided by the shareholder equity value in the market. It represents the profitability in comparison to the equity the company has issued. A larger ratio asserts that company performance has been positive and is reflected by a higher income per share issued. This is a critical ratio when assessing a stock value as is informs investors what the current and past return on equity has been. Net income/Shareholders equity Industry Average= 20.68%

(From http://yahoo.multexinvestor.com) 2003: 8,039/39,337=20.44% 2002: 6,671/35,102=19.00% 2001: 6,295/31,343=20.08% 2000: 5,337/25,834=20.66% 1999: 4430/21,112=20.98% (From http://www.walmartstores.com) The five years average on ROE for Wal-Mart is 22.23% whereas the industry norm has been 20.68%. The Wal-Mart ratio is similar to its competitors and has stayed around 20% in recent years. Asset-Utilization Ratios These ratios are critical in evaluating a firms capability to use it fixed assets to generate sales. These ratios are in multiples and are figures that show how many times per year inventory turns over, or accounts receivables are received. Receivable Turnover Sales / Receivables (dollar amount in millions) Industry Average = 10.97 x (From http://yahoo.multexinvestor.com) 2003: 244,524/ 2,108 = 115.99 x 2002: 217,719/ 2,000 = 108.85 x 2001: 191,329/1,768= 108.23 x 2000: 165013/1341= 123.05 x 1999: 137634/1118= 123.11 x (From http://www.walmartstores.com) Receivable turnover is a common utilization ratio that helps investors evaluate efficiency and sales strength of companies. The ratio is vastly greater than the industry and makes it a attractive factor for potential Wal-Mart investors. Inventory Turnover Sales / Inventory (Dollars in millions) Industry Average = 6.21x (From http://yahoo.multexinvestor.com) 2003: 244,524 / 24,891 = 9.82 x

2002: 217,719 / 22,614 = 9.62 x 2001: 191,329/21442= 8.92 x 2000: 165013/19793= 8.34 x 1999: 137634/17076= 8.06 x (From http://www.walmartstores.com) Again, Wal-Mart has shown superior strength in their ability to clear their shelves faster than most other competitors in their industry. This means more sales turnover, which filters to less holding and storage cost. There has been a positive growth in inventory turnover, and once again, this positive ratio makes that stock more attractive to investors. Total Assets Turnover Sales / Total Assets Industry Average = 2.4 x (From http://yahoo.multexinvestor.com) 2003: 244,524 / 94,685 = 2.58 x 2002: 217,719 / 83,527 = 2.6 x 2001: 191,329/78130= 2.45 x 2000: 165013/70349= 2.35 x 1999: 137634/49996= 2.75 x (From http://www.walmartstores.com) Finally, Wal-Mart has also shown a strong ability to have return on sales in relation to their total assets, among their peers. This ratio states that certain fixed assets were able to generate a constant level of revenue. The higher ratio postulates a more secure income flow for Wal-Mart and is a positive factor in valuing the stock Liquidity Ratios Current Ratio The current ratio is of paramount importance when evaluating a company. It is determined by dividing the current assets of a firm by its current liabilities. It indicates whether the firm can pay off its short-term debt in an emergency by liquidating its current

assets, and how fast the current assets are turned into cash during an ordinary cycle. The higher the ratio is, the stronger the company financing and lesser the chance of the company going into liquidation. Current assets/Current liabilities (dollars in millions) Industry Average=1.20 (From http://yahoo.multexinvestor.com) 2003: 30483/32617=.93 2002: 28246/27282=1.04 2001: 26555/28949=.92 2000: 24356/25803= .94 1999: 21132/16762= 1.26 (From http://www.walmartstores.com) The five year average current ratio for Wal-Mart is 0.94, and 1.20 for the industry as a whole. Wal-Marts current ratio is less than one, which means that by selling out its current assets in an emergency, it still would not be able to cover its liabilities. This ratio would have a heavy bearing on the investor motivation to invest in Wal-Mart. The fear of not being able to cover its liabilities in the event of an unforeseen circumstance may deter investors from purchasing the stock. Quick Ratio The Quick ratio is the current assets minus the inventory divided by current liability. It demonstrates the firms ability to pay off its short-term debt in an emergency by liquidating its most liquid assets like cash, marketable securities and receivables. The higher the ratio is, the better the company financing.
(Current

assets-inventory)/Current liability Industry Average = 0.36 (From http://yahoo.multexinvestor.com) 2003: (30,483-25,056)/32,617=0.1664 2002: (27,878-22,749)/27,282=0.188 2001: (26,555-21,644)/28,949=0.1696 2000: (24356-19793)/ 25803=0.1768 1999: (21132-17076)/ 16762=0.2419

(From http://www.walmartstores.com) The five years average of quick ratio for Wal-Mart is 0.19 and the five years average of quick ratio for the industry is 0.36. Wal-Marts lower quick ratio is caused by Wal-Marts high investment in inventory. However, Wal-Marts high inventory is needed because if they do not have the item in stock the customer will go to a competitor such as Target to get it. It is well known that keeping a customer is cheaper than getting new ones; thus Wal-Mart does not want to lose any of its customers. Net working capital to total assets This ratio is part of the group of ratios that help paint a picture concerning a companys liquidity. Net working capital measures of current assets less short-term obligations minus the firms total assets. This formula is a great component to help figure out a companys credit. The higher the ratio, the better the companys credit rating will be. A companys credit can be said to improve, in part, if there is a trend in this ratio increasing over time. (Current assets current liabilities) / Total Assets 2003: (30,483 32,617) / 94,685 = -.0225 2002: (27,878 27,282) / 83,527 = .0071 2001: (26,555 28,949) / 78,130 = -.0306 2000: (24356-25803)/ 70349= -.0201 1999: (21132-16762)/49996= .0874 (From http://www.walmartstores.com) Other factors not included, Wal-Marts current numbers seem to indicate a not so optimal level of liquidation. Although 2003 was better than the ratio in 2001, the company has had a roller coaster trend, from negative to positive and back to negative. This could be seen as a sign of weak credit. Yet, it is very important to look at the big picture and include other variables that help explain why this ratio is where it is. These external factors might include economic conditions, legal issues, interest rates etc. 9

Debt-utilization Ratios Long-term debt to equity These ratios reflect the degree of financial leverage a firm is using. More specifically this ratio focuses on the capital structure of a company, and its reaction to changes in revenue with its existing use of debt and capital structure. The higher the ratio the higher financial leverage is used by the company, a higher percentage of capital budgeting is financed by debt versus equity on average. This is a percent of debt over equity. Long-term Debt / Stock Holders Equity Industry Average= .63 (From http://yahoo.multexinvestor.com) 2003: 16,607 / 39,337 = .4222 2002:15,617 / 35,102 = .4449 2001:12,501 / 31,343 = .3988 2000:13672/25834=.5292 1999:6908/21112=.3272 (From http://www.walmartstores.com) Any debt, which companies issue or take, becomes liabilities to the company. Furthermore, theses risks are directly transferred to the shareholders. So, it is inherent that the more debt financing the more risk is present. Yet it is critical to understand what type of firm we are talking about, industry, and position of firm being assessed. High debt structure for Wal-Mart is not necessarily a bad thing. Actually, it may be the most profitable for their capital budget. Although, for other companies that are cyclical such as airlines having a high debt structure is almost fatal as we have recently seen. In relation to the industry average of .63, Wal-Mart is doing much better than the average. This means that as a percentage Wal-Mart is using less debt in relation to their equity. This

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gives them flexibility by not being held down to obligations. In addition, it gives them opportunity to borrow more money if needed. Price Ratios Price to earnings Price ratios are used to help evaluate what investors believe the price is to actual figures of earning and equity. These are one of the most critical groups of ratios because it is often hard to determine what a companies stock should trade at. Using these ratios, it is possible to get some understanding about where on the spectrum of investments does a stock lie. In addition, it help to put in perspective stock prices with changing earnings and equity, so investors have some reference point to help them accurately value a stock. For example if a stock has a P/E of 20 that means it is trading at 20 times it earnings. Well if investors are comfortable with such a P/E, investors have a better idea of what the stocks should trade at, if earnings were to rise or fall. Price / Earnings Industry Average = 31.1 (From http://yahoo.multexinvestor.com) Jan 2, 2003: $51.60 / 1.81 = 28.51 Jan 2, 2002: $58.05 / 1.49 = 38.96 Jan 2, 2001: $53.88 / 1.41 = 38.21 (From http://www.walmartstores.com) Price to earnings is one of the most recognizable ratios among investors because it gives investors some type of reference to a stocks price and infers a lot about what type of risk is involved. Typically a lower P/E is viewed as a less risk and more conservative investment than one with a high P/E. A P/E can also signal to other investors what the current trend is amongst investors. Stocks that trade at high P/Es are many times seen to pose some chance of making substantial profits at some time. Investors seem to believe

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that Wal-Mart is best traded at 28 times it earnings, much lower multiple than it traded two years ago. This might also mean that the stocks are undervalued and have room to rise. As related to the Industry average, Wal-Mart is actually trading at a higher multiple than its closest competitors. This may be due to many reasons, including but not limited to, investors favoring Wal-Mart, news, and expectations of future strength and earnings and external economic conditions. Price to book value Common stock price / Book value per share Industry Average = 6.3 (From http://yahoo.multexinvestor.com) Jan 2, 2003: $51.60 / $8.89 = 5.8 Jan 2, 2002: $58.05 / $7.86= 7.38 Jan 2, 2001: $53.88 / $7.02 = 7.67 (From http://www.walmartstores.com) With this ratio, a lower number signifies a company that has more of its stock price in higher correlation to its actual worth. As seen with Wal-Mart, this ratio has lowered over the past years, signifying a stronger and possibly a safer stock, because so much more of its value is real, and not interpreted by other investors. Related to other companies, Wal-Mart has a higher average ratio. Dividends to price or (Dividend yield) Dividends per share / Common stock price Industry Average = .60% (From http://yahoo.multexinvestor.com) Jan 2, 2003: $.30 / $51.60 = .58% Jan 2, 2002: $.28 / $58.05 = .48% Jan 2, 2001: $.24 / $53.88 = .45% (From http://www.walmartstores.com) This ratio is vertical, yet it is open to a lot of interpretation and variation. Dividend policy among firms differs greatly. Investors also view dividends in different

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regards. The Dividend yield is the percentage of a cash payment of return by purchasing the stock. Although some who believe in the bird in hand theory, view a higher yield and a higher payout ratio as a more positive attribute, other believe lower dividends and higher reinvestment that leads to higher capital gains is more beneficial. This primarily goes back to taxes and the fact that capital gains tax is much lower than personal income tax, which dividends are taxed at. Wal-Mart has a lower dividend payout, in relation to other stocks. Wal-Mart probably has many positive NPV projects, which it would like to invest in. In that case, investors are better off with a lower dividend yield and a higher appreciation on their stock. This is true for most other stock in Wal-Marts industry, with the average only .60% it is hard to say that any investor buys these industries stocks with any hopes of earning a major return of dividends alone. Dividend policy varies so much between companies that it is hard to judge companies against one another on dividend policy alone. Valuation Ratios are very helpful in determining the health of a company. Ratios can help determine if a company is in financial trouble, near bankruptcy, moving in a positive direction, and experiencing growth. However, ratios cannot determine if the stock is currently undervalued in the market place or overvalued. In order to determine this, several different valuation models must be employed. These models include nonconstant growth, constant growth, income statement method, combined earnings and dividend, and four different average price models. Capital Asset Pricing Model

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In order to use any of these models, the cost of equity must be determined. The capital asset pricing model is a model that helps find an appropriate cost of equity for a company. The CAPM uses the risk-free rate, beta, and market risk premium to derive the cost of equity (Ke = Rf + Rm). The risk-free rate used to determine the cost of equity was the ten year U.S. Treasury Bond(3.43%). Any shorter treasury bond will give an inaccurate estimate because rates are presently low ; the cost of equity will be lower but this is not sustainable because rates will eventually increase and we are looking for longrun estimates. The beta in the equation is the individual companys risk. The beta for Wal-Mart was found using Value-Line. Their beta which was 0.89, means Wal-Mart is a less risky investment than the market. This is very good for risk-adverse investors. The market risk premium is 8.3% found from Standard and Poors. Containing these figures, the cost of equity for Wal-Mart is 10.8% (Ke = 3.43% + .89 x 8.3%). Constant Growth Model The constant growth model assumes that dividends will increase by the same increment every year. The equation used is Po D1/ (Ke-g). This equation also assumes that the cost of equity is greater than the dividend growth rate. For Wal-Mart this is not true. Using the growth rate of 12%, as projected by Value-Line, the equation cannot be solved because Wal-Marts cost of equity is only 10.8%.
*Constant Growth Model Po=D1/(Ke-g) Po = .32/(.108-.12)

*This model cannot be used because the cost of capital is less than the growth rate.

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Non-Constant Growth Rate The non-constant growth model is used for companies who do not have a constant growth in dividend payments. This model uses two different growth rates, one for the coming years and one for all years. Future years, the dividends are summed and the total is discounted back to its present value. In order to determine dividends to infinity, the constant growth model is used and these are discounted back to present value as well. Then the two numbers are added together. Wal-Mart has a projected growth rate in dividends for the next five years, but they do not project indefinite growth in dividends. So, for the purpose of this valuation technique we used the projected 12% growth rate in dividends for the next five years and an 8% growth rate there after. It is assumed that Wal-Marts growth will slow down because they are entering the maturity stage of the industry life cycle. They operate in almost every state and several countries, so there are not nearly as many expansion opportunities as there once were. Using these two growth rates the stock price of Wal-Mart should be valued at $36.70 (see below for calculation). This means that Wal-Marts stock is currently overvalued because it is trading at $52.92 as of May 18th 2003. .

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Non-Constant Growth Model Year 2003 2005 2006 2007 2008 Po = D1/(Ke-g) Po = 1.49/ (10.8% 8%) Dividend 0.32 0.3584 0.401408 0.449577 1.4907362 PV 0.288809 0.323466 0.362282 0.405755 1.380311

53.24058 Po=

35.32513 36.70544

Income Statement Method The income statement method uses sales times after-tax profit margin to determine earnings, which are then divided by shares outstanding to get the earnings per share. These earnings per share are multiplied by the P/E ratio to determine the stock price. Historical numbers and growth rates are used to derive the future years sales and margins. For Wal-Mart, the growth rate used for sales was 12% and the projected profit margins are 3.5%, both of which were determined using Value-Line. The final analysis indicates that the stock price should be $59.72 in 2003 and $72.77 in 2004 (see below). These numbers indicate that the stock is currently undervalued and is a good purchase.

Income Statement Method

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Year

1998 1999 2000 2001 2002 2003e 2004e * Growth rate = 12% ** Projected profit margins for '04-'07= 3.5%

Sales* 137,634 165,013 191,329 217,799 245,000 273,000 305,760

AfterTax Profit Margin* * 3.20% 3.50% 3.30% 3.10% 3.30% 3.30% 3.50%

Earnings 4404.288 5775.455 6313.857 6751.769 8085 9009 10701.6

Shares 4482 4457 4470 4453 4414 4375 4265

EPS 0.982661 1.295817 1.412496 1.516229 1.831672 2.0592 2.509168

P/E Ratio 31.2 39.1 38 34.9 30.4 29 29

Stock Price 30.66 50.67 53.67 52.92 55.68 59.72 72.77

The Combined Earnings and Dividend Model The current price of Wal-Mart as of May 18, 2003 is $ 52.92. Using the Combined Earnings and Dividend Model, the price of Wal-Mart seems to be overvalued. For the Combined Earning and Dividend Model the estimated EPS Growth rate used was found through Value Line. The Payout Ratio estimate was found through Yahoo Finance and PV factor was calculated through CAPM. The actual calculations of this model can be seen in below. This model combines dividend stream plus a market price at the end of the dividend stream to give the value of the stock. For Wal-Mart it is observed that due to a low stream of dividend, this model would project that Wal-Mart is overvalued. This model calculated 2003 stock price to be $48.94 and 2006 to be $54.16. Looking, at these figures it can be shown that for this model the current stock price should not be as high as it is until future years.
Combined Earnings and Dividend Model Year Estimated EPS Growth (14%) Payout Ratio(16.18%) Estimated DPS PV Factor (10.81%) Present Value of Cash Flow

2002 2003 2004 2005 2006 Part A

1.8 2.052 2.33928 2.6667792 3.040128288

0.1618 0.1618 0.1618 0.1618 0.1618

0.29124 0.3320136 0.378495504 0.431484875 0.491892757

0.902445628 0.814408111 0.734959039 0.663260571 0.598556602

0.26282826 0.27039457 0.27817869 0.2861869 0.29442566 1.39201409

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Part B 2006EPS

P/E 3.04

Price 2006 PV Factor 29 88.16 0.598556602 52.7687501 54.1607641

Estimated 2006 Earning Per Share x P/E Ratio = Price 2006 x PV Factor+ Part A=

Other Valuation Models Using Average Price Ratios All the information for: Sales per share, Dividend per Share, Earnings per Share, Cash flow per Share, and Book value per share where taken from Value Line. Stock Price high and low and P/E ratios high and low were taken from Standard and Poors analysis for Wal-Mart. The nine-year average was then taken and used to calculate various valuation models. Adding the average high and low, stock price and dividing by two is how the average stock price was found. In this instance, it is $32.81 for year 19942002. This number was then used in the calculation below. The Price to Dividend per Share came out to be $59.80 for 2003, inferring that the stock is undervalued by about $6.88. The Price to Earning per Share is $62.98 for 2003 also showing that Wal-Mart Stock is undervalued. The Price to Cash Flow per Share is $62.39 and thus concluding that Wal-Marts stock is undervalued. The Price to Book Value per Share also shows the stock to be undervalued. These four valuation show that Wal-Marts stock for 2003 should range from $59.80 to 63.49, thus being undervalued anywhere from $6.88 to $ 10.57. All calculation can be viewed below.

Year 1994 1995 1996 1997 1998 1999 2000

Sales Price per Share 17.96 20.42 22.87 26.32 30.71 37.02 42.8

Dividend Per Share 0.09 0.1 0.11 0.14 0.15 0.19 0.23

Earnings per Share 0.59 0.6 0.67 0.78 0.99 1.28 1.4

Cash Flow per Share 0.82 0.88 0.99 1.15 1.41 1.81 2.05

Book value per Share 2.77 3.22 3.74 4.13 4.71 5.8 7.01

Stock High 14.62 13.81 14.12 20.96 41.37 70.25 69

Price P/e Low 10.5 10.3 9.54 11 18.8 38.7 41.4 High 25 23 21 27 42 56 49

Ratio Low 18 17 14 14 19 21 30

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2001 2002 Projected 2003 9- Year Average

48.91 55.5 62.4 33.61222222

0.27 0.3 0.32 0.175555556

1.5 1.8 2.05 1.067777778

2.25 2.6 2.95 1.551111111

7.88 9.1 10.4 5.373333333 Average Stock Price

58.75 63.94 40.758 32.805

42 41.5 24.9

39 35 35.22

28 24 20.556

1) Price to Dividend per Share

Average price / Average DPS = Price to DPS Ratio x Est.2003 DPS= Projected 2003 Price

186.86392 2) Price to Earning per Share

Average price / Average EPS = Price to EPS Ratio x Est.2003 EPS= Projected 2003 Price

59.79646

30.722685 3)Price to Cash Flow per Share

Average price / Average CFPS = Price to CFPS Ratio x Est.2003 EPS= Projected 2003 Price

62.9815

21.149355 4)Price to Book Value per Share

Average price / Average BVPS = Price to BVPS Ratio x Est.2003 BVPS= Projected 2003 Price

62.3906

6.1051489 Range of Price

63.49355 $59.80 to 63.49

All the valuation models for Wal-Mart using the dividend show that the stock is overvalued. This seems to stream from the fact that Wal-Mart does not issue many dividends because they are still in the expansion stage. They reinvest into creating more stores around the country. This explains why the non-constant dividend growth model and the combined earnings and dividend model are the only ones that show that the stock is overvalued. The other valuations models like the Income Statement Method and the Price Ratios to 9-year average show that the stock is undervalued. We conclude that the stock is undervalued because it is a good buy for investors who are not looking for immediate returns in the form of dividends. Those dividends seem to be used for a more profitable reinvestment like expansion and becoming the market leader and discount stores. Conclusion

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Wal-Marts is a company who holds a dominant position in the retailing industry. The price ratios for Wal-Mart gives a concrete indication to an investor of what the stock price should be compared to actual figures of earning and equity. Wal-Marts price ratio currently trades at 28 time its earning, which is higher than its competitors. However, this can be partly explained by investors expectation on future strength and growth. Also, the Price to book value for Wal-Mart has a lowering trend, which seems to show that it is becoming a safer and a more stable stock to invest in. The Dividend yield for Wal-Mart is lower than the industry average, signifying that Wal-Mart is using its cash revenue to reinvest in the company. Wal-Mart is still viewed as a expanding company because of their huge expansion plans for the upcoming years. Compared to its competition it has a more robust operating foundation because of the management systems they have applied. This has helped to create extraordinary turnovers for receivables, inventory, and assets. In addition, all the Valuation models that did not include dividend showed that the stock was undervalued. All these factors have supported Wal-Mart stock being a good buy. A point of note is that numerous other factors can influence Wal-Marts stock price. General market conditions, the economic climate and geo-political tensions (e.g. Iraq war) are just a few influences on its stock price. More specifically, the retailing sector has its particular influences that are generic to the sector and may not apply only to WalMart. For instance, poor Christmas spending by consumers would generally affect most of the large retailers.

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