Essay on Wmt Valuation
In utilizing the fundamental data provided by the 2010 Richard Ivey School of Business Foundation article titled Valuing Wal-Mart - 2010, I have made the following conclusions regarding the value of Wal-Mart (WMT) stock as of February 2012. * Utilizing the constant growth dividend discount model (DDM), the value of Wal-Mart’s stock price is $60.20. The most recent closing price of Wal-Mart stock was $53.48. Given this information, the constant growth DDM valuation suggests that the Wal-Mart stock is currently undervalued. * Utilizing the two-stage DDM approach, the value of Wal-Mart’s stock price is $83.95. Similar to the constant growth DDM valuation conclusion, the Wal-Mart stock is currently …show more content…
CAPM = E(R) = 3.68% + 0.66(5.05%)
Required/Expected Return = 7.01%
Price/Earnings (P/E) Multiple Approach
Traditional P/E Metric
The Price/Earnings (P/E) metric is one of the most common and easiest valuation metrics to obtain. In general, a high P/E suggests that investors are expecting higher earnings growth in the future compared to companies with a lower P/E. Wal-Mart’s P/E on a standalone basis doesn’t provide much insight; however, when compared to industry competitors and the general market, this simple valuation statistic can become a quick relative valuation metric. As of February 1, 2010 Wal-Mart’s trailing P/E ratio was 14.7 times. Below is a graphical representation of the P/E ratios for Wal-Mart’s top five competitors as well as the general market, as measured by the S&P 500.
As displayed in the above chart, Wal-Mart’s historical 5-year, 10-year, and total average (since 1994) P/E ratios have mostly been slightly above its main competitors and the overall market, as measured by the S&P 500. This implies that, on a historical basis, the stock has been a bit more expensive (overvalued) from a P/E valuation standpoint. However, it is worth noting that the 10-year average numbers could be skewed due to Wal-Mart’s high P/E multiples in the early parts of 2000. This was a period when Wal-Mart was still experiencing earnings growth in the high