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Weekly Stock Analysis

Updated: Feb 1, 2021

Company: Walmart Inc

Ticker: WMT Previous Close: $143.84 (1/27) Industry: Retail

Short-term: Hold

Middle-term: Buy

Long-term: Buy


Economic Moat

Free Cashflow

Walmart Inc (WMT):

Free Cashflow: $23,623,000,000

Revenue (= Sales): $542,026,000,000

Free Cashflow / Revenue (>5%) = 4.36%➤ On the surface this percentage appears to be a bit low, but upon thorough analysis, it must be understood as being relative to the industry standard. From this perspective, considering the Retail and Discount Store industry that Walmart is in along with their “low cost” strategy, these factors naturally result in lower margins. Realistically speaking this margin is actually quite good.

Net Margins (> 15%)

Walmart Inc (WMT):

Net Income (Consolidated) : $17,895,000,000

Revenue : $542,026,000,000

Net Margin = Net Income/Revenue = 3.30% ➤ This is another percentage that appears to be quite low; however, this is again a result of the industry that Walmart is in coupled with their efficient, low-cost strategy. Compared to the overall industry, this percentage is actually above average.

ROE (> 15%)

Walmart Inc (WMT):

Return on Equity (ROE)= Net Income/Shareholder's Equity

ROE = 22.90% ➤This is a very good percentage despite having lower margins.

ROA (> 6%)

Walmart Inc (WMT):

Return on Assets (ROA)= Net Income / Assets

ROA = 6.62% ➤ This is also a good percentage, comparable to Walmart’s ROE.

Economic Moat Conclusion

Walmart Inc (WMT): All in all, Walmart has low free cashflows relative to its revenue but it is still these free cashflows that are very robust in comparison to industry competitors. Walmart also has low net margins due to their low-cost strategy; yet, they are still above average for the overall industry. Additionally, Walmart has a good ROA and ROE. From these factors and the fact that Walmart has such a strong presence in their industry, in the United States, and internationally I can conclude that they indeed have an economic moat.


Walmart Inc:

In calculating the current valuation of Walmart Inc, we will use their current free cashflow of $23,623,000,000. In the past, their cashflow was always positive but there has been a downward trend in recent years. Based on the more recent figures, I’m assuming an average yearly growth of 7% in the first ten years. Because of their economic moat, very strong position in their market as previously mentioned, and Walmart’s performance throughout prior economic recessions I calculated a discount rate of 7%. Taking each of these variables into account and engaging in further analysis, I have come to a fair value per share price of $257.41.

Current Price: $143.84

Estimated Fair Value Price: $257.41

➤43.15% Margin of Safety. This percentage is certainly more than enough for a recession-proof company like Walmart. Having taken all aspects into consideration, Walmart seems to be sitting at a good value or can even be seen as being slightly undervalued at the current time.

20 Point Analysis

1. CEO

Walmart Inc: The current chief executive, Doug McMillon, has worked for Walmart for nearly 30 years. In fact, practically his entire professional career consists of having worked for Walmart as he started his journey working for the firm as a summer associate. The capacity and extent to which McMillon has worked for Walmart are indicative of him being highly familiar with the company, that he is capable of making the right decisions when necessary, and that he is extremely loyal to the brand and continued success of the company.

2. Is the company innovative?

Walmart Inc: They invest large portions of revenue into incremental innovation with the intent of enhancing customer satisfaction. Incremental innovation, as is used in this context, refers to an innovation that occurs in smaller, incremental steps that are less disruptive for organizational proceedings instead of occurring all at once. Walmart is also investing large sums into new technology such as developing apps and autonomous grocery delivery.

3. Can the company grow?

Walmart Inc: Objectively speaking, Walmart is already one of the largest companies in the world. Even though this is the case, due to their progressive investments they have consistently been reinforcing their position in the industry while also expanding into new industries. They are expected to grow well into the future but not at very high rates and this is ok considering the company is not a growth stock but more of a stable, long-term, recession-proof stock.

4. How does the company grow?

Walmart Inc: Walmart grows by the previously mentioned strategy of reinforcing their existing positions by investing in innovative business processes. As explained in point two, this is mainly an investment in consistent, incremental innovation. It should also be noted that Walmart grows by entering into new industries resulting in more opportunities for future growth and prosperity.

5. Is the company a market leader?

Walmart Inc: As one of the biggest companies in the world and as a result of the firm dominating their industry, Walmart certainly is the market leader. Walmart benefits from economies of scale and several other advantages due to its size, reach, and adaptability which is also extremely beneficial in their industry. Still, Walmart must be careful as they continue growing since their size could cause inflexibility and bureaucracy issues that stifle future growth and opportunities.

6. Is their market leadership safe?

Walmart Inc: Due to their strong economic moat and their economies of scale Walmart’s market leadership is safe. Still as mentioned in point five, possible problems like inflexibility and bureaucracy should be monitored the longer one is invested into the company.

7. Is there foreign exchange risk or commodities risk?

Walmart Inc: Walmart is, in fact, influenced by foreign exchange risk with them operating internationally as mentioned in their annual report. As with every other company, they also run many other risks, but this is inherent to conducting business in general.

8. How are the profit margins?

Walmart Inc: The company has a net margin of 3.30%. This is very low and due mainly to their low-cost strategy but this percentage sits well above average compared to the industry at large.

9. How much capital does the company need?

Walmart Inc: Walmart has sufficient cashflows to pay for the entirety of its operations. Though this is the case, they still have a lot of debt. This is not a factor that should be alarming though as more debt presents future possibilities for growth and expansion, but one should also keep track of the firm’s debt as it does constrain other aspects of their business.

10. Does the company have a loyal customer base?

Walmart Inc: Walmart does have an extremely recognizable brand in the United States and around the world. Due to their massive inventory to which customers can choose from at fair and competitive prices, more people elect to shop at and continue shopping at Walmart. Such a brand that has scaled to the size of and been as efficient as Walmart over the decades is not an easy feat and thus one of the primary variables that differentiate Walmart from their competition.

11. How much cash does the company produce?

Walmart Inc: Their free cashflow relative to their revenue isn’t very high but due to their economies of scale that they have capitalized off of this is not a problem. These lower ratios are also inherent to the retail industry so actually, they are doing pretty well.

12. Value creation over the past ten years?

Walmart Inc: This company has increased its value to about 174% over the course of the past ten years. This is a decent percentage but seeing how Walmart faired very well throughout the past and even the current recession, this ensures some protection. This also fits into their risk profile quite well.

13. Can the company pay its bills?

Walmart Inc: This firm has a quick ratio of 0.25 and a current ratio of 0.83. This means that they cannot pay back their current short-term debt and this is not very good.

14. How does the company finance itself?

Walmart Inc: This company finances themselves by use their cashflow and leveraging their debt. One could argue that they use too much debt; however, considering that they were able to manage this successfully in the past should alleviate certain skepticism moving into the future.

15. How much debt does the company have?

Walmart Inc: Long term debt: $61.58B Shareholders Equity: $81.43B ➤ Debt to Equity Ratio: 0.77 ➤ This ratio is actually a bit too low, but it should be iterated once more that since they were able to manage this throughout their history, moving into the future this is far less concerning.

16. What is their Piotroski F-score?

Walmart Inc: 7/9 ➤ This is a great score and actually a lot better than other companies.

17. What is the P/E-ratio?

Walmart Inc: 21.12 ➤ This is a decent ratio considering their growth potential and risk profile and regarding the general rules of price-to-earnings ratios, this is indicative of a fair valuation at the time for the company.

18. What is the P/B-ratio?

Walmart Inc: 5.09 ➤ This is a high ratio but not the end of the world for the company so to speak. Book value is an accounting value which means there is room for interpretation even though there are certain standards that should be followed.

19. What is the EV/EBITDA ratio?

Walmart Inc: 12.19 ➤This ratio is high and similar to the other valuation ratio’s seen above which could mean that the company is more expensive (valuation-wise) than it should be but in the case of Walmart this should not be perceived as too disconcerting for investors.

20. WACC?

Walmart Inc: 4.59% ➤ This percentage is low, which overall is good for the valuation of the firm. This lower percentage is due in part to the higher amount of debt which that Walmart possesses which is a cheaper way of financing and expanding the brand. This would then naturally result in a lower weighted average cost of capital (WACC).

Total Score

Walmart Inc: 14/20 ➤ Altogether this is a good score and Walmart can be seen as a recession-proof company due to its size and economies of scale. Growth is not spectacular when looking at certain points of stagnation and general valuation, but this is not a necessary factor as Walmart could be a great way to diversify one’s portfolio with a more stable stock that maintains consistency while searching elsewhere for higher growth stocks.

All the information provided is personal opinion and not directly applicable financial advice. I have no ties to the above company and am not being compensated on their behalf for the writing of this analysis. You should make your own decisions based upon evidence and what you believe is best for you and your financial well-being i.e., conducting your own due diligence.

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