Running Head: FINANCIAL MANAGMENT

Investment Analysis and Recommendation Paper

[Name of the Writer]
[Name of the Institution]

FINANCIAL MANAGEMENT

2
Investment Analysis and Recommendation Paper

Introduction
Sam Walton renowned businessman launched Walmart on July 2, 1962, in Rogers
which opened the doors for people to save money and live better! Sam Walton initiated
Walmart with one store in Rogers and today Walmart is operating more than ten thousand
retail units under sixty nine different banners in twenty seven countries. Almost two million
hard working associates are serving for two hundred million customers.
Walmart has great growth pattern and it is making a difference in its approaches
comparatively to its competitors. In the fiscal year 2012 Walmart delivered strong financial
performance and increased its net sales by 5.9% to $443.9 billion, (Annual Report, 2012).
The operating income of Walmart is increased by 4% to $26.6 billion. The earning per share
of Walmart is increased from $4.18 to $4.54 from preceding year (Annual Report, 2012,
http://www.walmartstores.com/sites/annual-report/2012/WalMart_AR.pdf). Walmart added
52.2 million square feet by 1160 supplementary units which includes various acquisitions in
South Africa and United Kingdom. Walmart delivered $11.3 billion exceptional returns to the
shareholders by giving them stock dividends. Walmart is conducting its business operations
strategically and making exceptional business progress.
Walmart U.S. believes in hard work and it is investing in lower prices and making real
improvements in merchandising and operations. Positive sales increments are giving high
returns on investments and equities. Walmart has never focused price leadership as Walmart
believes in serving rather than making huge amount of profits by charging high prices of the

FINANCIAL MANAGMENT

goods and services. Walmart believes in cost effectiveness and it initiated to invest $2 billion
in prices by expenses reductions and making productivity enhancements during the next
coming up years.
Walmart international is achieving exceptional sales targets and achieved $125 billion
sales. Walmart is among top three world largest retailers. Walmart is focusing to increase the
profitability in China and Brazil especially because Walmart is not achieving high
profitability from over these countries. Walmart has initiated Powered by Walmart as
initiative to strengthen the productivity and diminishing the extra expenses. There is no
suspicion that Walmart has proved itself as best positioned global trading retail stores.

Discussion
Wal-Mart Stores, Inc. (Walmart) is operating various retails stores in different formats
around the world. The companys philosophy of pricing is Every day low pricing EDLP.
The company is running in three different business segments, Walmart International, The
Sams Club and Walmart U.S. during the fiscal year 2012, Walmart U.S. segment accounted
for 60% of its net sales in operating retail stores in 50 states of the United States. Walmart
international is mainly generating income from 26 countries. Sams club segment is
consisting of warehouse membership clubs operating in 47 states in the United States and
Puerto Rico. Online retailing operations have also contributed for approximately 12% of its
net sales.
Walmart is operating retail stores in different formats worldwide, it operates apparel
stores, warehouse clubs, retail stores, restaurants, supermarkets, discount stores, supercenters
and neighborhood markets. Walmart significant five strategies are making it a global leader
these are developing people, driving the productivity loop reinvigorating customer-focused
culture, leading on social sciences and winning in Global e-commerce.

FINANCIAL MANAGMENT

Walmart main points of focus are growth, profitability and leverage (Annual Report,
2012);
1. Profitability/Returns: Walmart is further looking for potential investors so that
it may expand further and invest into new business segments and strategic
business units.
2. Leverage: For attaining leverage Walmart initiated Powered by Walmart
approach which aims at reducing the cost of expenses and enhancing the
profitability of the company.
3. Growth: Walmart is looking to invest and expand its chain of stores into
metropolitan areas domestically and purchasing the international brands
internationally so that it may grow deep down the market and gain exceptional
profits.
Industry Analysis and Macroeconomics
The primary competitors of Wal-Mart in North America are department stores for
instances ALCO stores Inc., Big Lots, Costco Wholesale Corporation, Family Dollar stores,
inc., Dollar General Corporation, The Bon-Ton Stores, Inc., Tuesday morning corp., and
Meijer, Canada's Zellers, The Real Canadian Superstore Kmart, Target, ShopKo. Walmart
Sam's Club competitors include smaller BJ's Wholesale Club chain and Costco (Forbes).
In the segment of grocery business, Walmart has to compete with numerous retailers
for instances; Dollar General Corporation and Family Dollar stores. As Wal-Mart shifted into
the business of grocery in the late 1990s here also it set chief supermarket chains in both the
United States and Canada (Forbes).
The profitability of Walmart is increased from $30000 in 1962 to $15.8 billion in
2012. Walmart returned $101 billion to shareholders by giving dividends and share
repurchases. The sales revenue from $250,000 in 1962 increased to $443.9 billion in 2012.

FINANCIAL MANAGMENT

Operating expenses are leveraged in the fiscal year 2012 and 2011. The operating expenses of
Walmart increased from 4.8% comparatively to 2011. Operating expenses of Walmart are
growing but at slower rate which is a positive sign for the company and moreover company is
focusing to reduce these expenses. Return on Investments ROI is one of the most
significant metric to share it with the investors so that investor may have a clear idea about
how effectively Walmart is managing and utilizing its current and non current Assets. The
return on Investment grew to 19.2% from 18.6% in the fiscal year 2012. Global e-commerce
and inventories have increased the operating cost but the price of investments will be covered
by full realization and achieving maximum profitability. Return on investment of Walmart
although increased but this incremental have been off set due to acquisitions. Return on
Investment is considered as non-GAAP financial measure which is 18.6% (Annual Report,
2012) and 19.2% in the year of 2011. Return on assets is 8.8% which was 9.1% in the year of
2011

The trend analysis of the company reveals that profitability of the company is
increasing consistently from 2006 to 2013 and the trend indicate that it will further increase
ahead till the year of 2015 if the economic factors remain the same.

FINANCIAL MANAGMENT

Capital Market Analysis

Market

COST

Wal-Mart

TGT

Industry

P/E Ratio (TTM)

17

23.04

13.23

15.63

20.09

Dividend Yield

1.68

1.4

1.3

1.47

Payout Ratio

36.03

26.4

29.03

20.0

18.19

Price to Sales Ratio

3.54

.38

.49

.64

.52

Price to Earnings Ratio

25.97

23.04

13.25

15.63

15.08

Price to Cash Flow Ratio

22.03

10.79

7.74

7.52

8.31

The dividend yielding of the share of Walmart is 2 which a positive sign from the investment
perspective and in future company expect that its share yield will increase. The price to cash
flow ratio is 7.74 which is almost equivalent to the industry average it indicates that Walmart
has enough liquidity to maintain and clear out its financial obligations and the sequential flow
of cash is consistent.

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7
Financial Analysis

The growth and financial ratios of the Walmart store indicates that company is having sound financial positions. The gross profit margin
percentage is increasing from 23.2 2004 to 24.9 2013. The operating income of the company is increasing from $15025 (2004) to $26558
(2012). The operating margin percentage is maintained from which 5.9 and it is one of the biggest aspects that in spite of variable economic
factors company is maintaining the operating margin. The net income of the company is also increasing from $9054 (2004) to $15699 (2012).

FINANCIAL MANAGMENT

The book value of per share of Walmart is also increasing from $10.08 (2004) to $21.44 (2012). The working capital which is the
difference of current Assets and current liabilities indicated that Walmart is having working capital deficiency and it current assets are not
enough to meet the current obligations. The financials of the company from the fiscal year 2004 to 2013 indicated that company is maintaining
good financial position however short term issues are still there but majorly company is has strong financial position in comparatively to
industrial average.

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The financial leverage of the company is 2.41 (2004) to 2.71 (2012) which indicates that the riskiness of company is maintained and the
company is utilizing the borrowed funds (either from financial institutions or from banks) and maintaining good financial structure. The debt and
Equity financing of the company is balanced and company is looking to go for equity financing more rather than debt financing.

FINANCIAL MANAGMENT

10

The operating cash flow is increasing. Years over years are frequently used by investors to assess the financial health of the organization and
from 2004 to 2013 Walmart is progressing by exceptional volume. The free cash flows to sales percentage ratio is 2.71 in the year of 2013 which
indicates that company is making progress and the cash flow is generating by every single unit sale which adding more financial value to the
company.

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11

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12

Liquidity Position of Walmart

The liquidity position of Walmart indicates that company has not enough cash to meet its current obligations and current liabilities are
more than current assets, The current ratio trend of the company is indicating that the liquidity position of the company is getting weaker which
may become severe in future. The quick ratio of the company is indicating that the quick assets of the company are not enough to meet the
current obligations of the company. Therefore Walmart essentially focus on the capacity building and consider the liquidity position by adding
more current assets. Walmart is fundamentally a retail store which must have to deal in inventory therefore it is recommended that Walmart must
have enough inventories to maintain its liquidity position plus stock levels. The debt to equity ratio of the company is stable and it is in
increasing trend which means that Walmart is having enough equity to meet its overall liabilities and it is the positive sign for the company as
this is indicating that Walmart is not merely based on debt financing but also equity based financing as well. The total worth of the company is
more than the obligations which proves its sustainability and credibility.
The days sales outstanding is 5 at maximum which means that companys inventory is not staying on the shelf and within the period of
five days the sale of the inventory take place. It indicates that customers are highly satisfied with the Walmart products and they are interested in
acquiring the companys product more comparatively to the other competitors. The cash conversion cycle of the company is working efficiently
and effectively as the time period is decreasing and from the year 2004 to 2013 it has brought down from 18 to 10.The inventory is not staying
for along period of time and the sales take place within few days to give the room for acquiring cash and cash equivalents.

FINANCIAL MANAGMENT

13

The receivable turnover indicates that after making credit sales company recovers its employed funds within 153.89 initially at 2004 but
by 2013, the companys receivable turnover has been reduced to 79.96. It is one of the remarkable achievement as far as the liquidity of the
company is concerned it indicates that company is looking forward to maintain its liquidity positions. The inventory turnover of the company is
7.72 from 2004 and by 2013 it has become 8.37. The inventory turnover of the company is acceptable and it indicates that the inventory cycle of
the company is very specious. The Fixed asset turnover of the company is indicating that the Walmart is that company is generating good amount
of sales by employing its fixed assets with efficacy and effectively.
Stock Valuation
For assessing the investment opportunities in Walmart share it is essential to find out the Walmart shares Intrinsic Value. The common
measure for assessing the shares worth fullness it is advisable to understand the level of price to earning ratio in comparison with competitors.
For comparison Walmart two competitors TARGET and COSTCO price to earning ratio is calculated and shown in the graph indicating that
Walmart is lagging behind from both of its competitors and the industry as whole. This is the indication that Walmart is valuation is lower in
comparison with competitors. The analysis is subjective on the basis of how a investor would react after viewing its price to earning ratio.
For finding the real worth of the share it is essential to find out the intrinsic value of the share. The intrinsic value is being calculated by using
Dividend Discount model. Multi stage model is being used for evaluating the Walmart stock.

FINANCIAL MANAGMENT

14

The financial analysis of the company is indicating that, at the time of aggressive growth the dividend growth rate is 13.29% and growing
by the rate of 5.84% per year. After financial analysis of the company it is considered that trend will remain continues till the next five years the
discount rate beta is set 0.26.
Wal-Mart Stores Inc., expected rate of return
Assumptions
Rate of return on LT Treasury Composite
Expected rate of return on market portfolio
Systematic risk () of 's common stock
Expected rate of return on 's common stock

3.24%
13.29%
0.26
5.84%

Wal-Mart Stores Inc., systematic risk ()

estimation
Variance(WMT)
Variance(NYC)
Covariance(WMT, NYC)
Correlation Coefficient(WMT, NYC)
(WMT)
(WMT)

21.81
32.60
8.44
0.32
0.26
0.78

After deciding on what growth rate discount rate must be settled. Capital Asset pricing model was used for finding out the discount rate
and it is taken 0.26 as Walmart low beta does not address fully to the market risk that is faced by the investor. However, discount rate is still
much lower than average but it at least better indicate the reality to a certain extent.

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15

Wal-Mart Stores Inc., required rate of return

Assumptions
Rate of return on LT Treasury Composite
Expected rate of return on market portfolio
Systematic risk () of 's common stock

3.24%
13.29%
0.26

Required rate of return on 's common stock

5.84%

Intrinsic Stock Value (Valuation Summery)

Wal-Mart Stores Inc., dividends per share (DPS) forecast
USD $
Year
0
1
2
3
4
5
5

Value
DPS
DPS
DPS
DPS
DPS
DPS
Terminal value (TV )
1

1
2
3
4
5

DPS or Terminal value (TV )

Calculation
1.59
1.83
= 1.59 (1 + 15.15%)
2.06
= 1.83 (1 + 12.26%)
2.25
= 2.06 (1 + 9.37%)
2.39
= 2.25 (1 + 6.49%)
2.48
= 2.39 (1 + 3.60%)
114.66
= 2.48 (1 + 3.60%) (5.84% 3.60%)
Intrinsic value of 's common stock (per share)
Current share price
t

The Intrinsic value of the share is $95.56 however its market current value is $73.51.

Present value at 5.84%

1.73
1.83
1.90
1.91
1.87
86.33
$95.56
$73.51

FINANCIAL MANAGMENT

16

Stock Chart of Ten Years

The stocks ten years chart indicates that companys share value is in increasing trend however there were declination in the period of
2006 to 2008 but later on the stock value increases and after computing the intrinsic value of the share it is considered that the share value will

FINANCIAL MANAGMENT
remain consistent and it will grow further. Investor must invest in the stocks of Walmart.

17

FINANCIAL MANAGMENT

18

The dividend per share of Walmart is increasing and in future it will be raising as the company has done various acquisitions those
retailing stores will be contributing further.

The earning per share of the Walmart is in increasing trend and investors have better option to invest in expect little margin with low riskiness.

FINANCIAL MANAGMENT

19

Capital Structure
Cost of Debt
For calculating the cost of debt, effective interest rates for long term debt and effective tax rate is used for finding out the weighted
average cost of debt. The Walmart annual report is having tax rates and interest rates therefore the cost of debt is calculated by the formula
KD=I (1-CT).
Cost of Equity
By using the dividend growth model it is estimated that growth rate of dividend is 19.08% ($0.67(1+g) 2=$0.95). The cost of equity
calculated by K0= D0 (1+g)/P0 +g, D0 is the current dividend quoted at the annual report of Walmart.

FINANCIAL MANAGMENT

20

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21

Conclusion

Wal-Mart Stores, Inc. (Walmart) is operating various retails stores in different formats around the world. The companys philosophy of
pricing is Every day low pricing EDLP. The company is running in three different business segments, Walmart International, The Sams Club
and Walmart U.S. during the fiscal year 2012, Walmart U.S. segment accounted for 60% of its net sales in operating retail stores in 50 states of
the United States. Walmart international is mainly generating income from 26 countries. Sams club segment is consisting of warehouse
membership clubs operating in 47 states in the United States and Puerto Rico. Online retailing operations have also contributed for
approximately 12% of its net sales.
Walmart is having an excellent financial structure and the cost of debt is 7.27% and the cost of equity is 9.07%. The stock intrinsic value
is $95.56 and its current market value is $73.51. Investor must invest into the company as the trends are demonstrating that the Walmart will be
making exceptional progress ahead.

FINANCIAL MANAGEMENT

22
References

Forbes Financial (2010), Forbes.com LLC 2010 Web. 17 Oct, retrieved from
http://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?
tkr=wmt&tab=searchtabquotesdark
Investopedia, Investopedia ULC 2010, Web Source
http://www.investopedia.com/terms/w/wide-economic-moat.asp
Morningstar, Morning, Inc. 2012 Web, 11 Oct. 2012
http://financials.morningstar.com/income-statement/is.html?
t=WMT&region=USA&culture=en-US
MSN, Thomson Reuters, 2010, retrieved from
http://moneycentral.msn.com/news/ticker/sigdev.aspx?Symbol=WMT
Reuters, Thomson Reuters, 2010, retrieved from
http://www.reuters.com/sectors/industries/rankings?view=size&industryCode=101
The Wall Street Journal, Dow Jones & Company, Inc 2010, data available at
http://online.wsj.com/public/quotes/main.html?symbol=WMT&type=usstock
%20usfund&mod=DNH_S
Wal-Mart Annual Report, 2012, Walmart Web source.
(http://cdn.walmartstores.com/sites/AnnualReport/2010/PDF/WMT_2010AR_FINAL
.pdf)
Wal-Mart Corporate, 2012, Wal-Mart Incorporation; retrieved from
(http://walmartstores.com/AboutUs/)

FINANCIAL MANAGMENT
Yahoo! Finance, Yahoo! News Network 2010 Web, http://finance.yahoo.com/q/pr?
s=WMT+Profile

Hoovers, Hoovers Inc, 2012, Available at http://premium.hoovers.com/subscribe/

23

FINANCIAL MANAGEMENT
24
Appendix
Wal-Mart Stores Inc., monthly rates of return

t
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
22.

Date
Feb 28, 2007
Mar 31, 2007
Apr 30, 2007
May 31, 2007
Jun 30, 2007
Jul 31, 2007
Aug 31, 2007
Sep 30, 2007
Oct 31, 2007
Nov 30, 2007
Dec 31, 2007
Jan 31, 2008
Feb 29, 2008
Mar 31, 2008
Apr 30, 2008
May 31, 2008
Jun 30, 2008
Jul 31, 2008
Aug 31, 2008
Sep 30, 2008
Oct 31, 2008
Nov 30, 2008
Dec 31, 2008

Wal-Mart Stores Inc. (WMT)

Dividend(WMT,
Price(WMT, t)
R(WMT, t)
t)
48.31
46.95
0.22
-2.36%
47.92
2.07%
47.60
0.22
-0.21%
48.11
1.07%
45.95
-4.49%
43.63
0.22
-4.57%
43.65
0.05%
45.21
3.57%
47.90
5.95%
47.53
0.22
-0.31%
50.74
6.75%
49.59
-2.27%
52.68
0.24
6.71%
57.98
10.06%
57.74
0.24
0.00%
56.20
-2.67%
58.62
4.31%
59.07
0.24
1.17%
59.89
1.39%
55.81
-6.81%
55.88
0.13%
56.06
0.24
0.75%

NYSE Composite Index (NYC)

Price(NYC, t)
9,124.54
9,261.82
9,627.73
9,978.64
9,873.02
9,554.50
9,596.98
10,039.30
10,311.60
9,856.85
9,740.32
9,126.16
8,962.46
8,797.29
9,299.60
9,401.08
8,660.48
8,438.64
8,382.08
7,532.80
6,061.09
5,599.30
5,757.05

R(NYC, t)
1.50%
3.95%
3.64%
-1.06%
-3.23%
0.44%
4.61%
2.71%
-4.41%
-1.18%
-6.31%
-1.79%
-1.84%
5.71%
1.09%
-7.88%
-2.56%
-0.67%
-10.13%
-19.54%
-7.62%
2.82%

FINANCIAL MANAGMENT
23.
24.
25.
26.
27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
51.
52.
53.

Jan 31, 2009

Feb 28, 2009
Mar 31, 2009
Apr 30, 2009
May 31, 2009
Jun 30, 2009
Jul 31, 2009
Aug 31, 2009
Sep 30, 2009
Oct 31, 2009
Nov 30, 2009
Dec 31, 2009
Jan 31, 2010
Feb 28, 2010
Mar 31, 2010
Apr 30, 2010
May 31, 2010
Jun 30, 2010
Jul 31, 2010
Aug 31, 2010
Sep 30, 2010
Oct 31, 2010
Nov 30, 2010
Dec 31, 2010
Jan 31, 2011
Feb 28, 2011
Mar 31, 2011
Apr 30, 2011
May 31, 2011
Jun 30, 2011
Jul 31, 2011

25
47.12
49.24
52.10
50.40
49.74
48.44
49.88
50.87
49.09
49.68
54.55
53.45
53.43
54.07
55.60
53.64
50.56
48.07
51.19
50.14
53.52
54.17
54.09
53.93
56.07
51.98
52.05
54.98
55.22
53.14
52.71

0.27
0.27

0.27

0.27

0.30
0.30

0.30

0.30

0.37
0.37

-15.95%
4.50%
6.36%
-3.26%
-0.77%
-2.61%
2.97%
2.53%
-3.50%
1.20%
9.80%
-1.52%
-0.04%
1.20%
3.39%
-3.53%
-5.18%
-4.92%
6.49%
-1.46%
6.74%
1.21%
-0.15%
0.26%
3.97%
-7.29%
0.84%
5.63%
1.10%
-3.77%
-0.81%

5,195.79
4,617.03
4,978.98
5,513.36
6,004.07
5,905.15
6,424.28
6,643.24
6,910.88
6,739.45
7,092.36
7,184.96
6,883.78
7,035.04
7,447.80
7,474.40
6,791.57
6,469.65
6,998.99
6,704.15
7,281.07
7,513.35
7,430.94
7,964.02
8,139.16
8,438.55
8,404.98
8,671.41
8,477.28
8,319.10
8,079.44

-9.75%
-11.14%
7.84%
10.73%
8.90%
-1.65%
8.79%
3.41%
4.03%
-2.48%
5.24%
1.31%
-4.19%
2.20%
5.87%
0.36%
-9.14%
-4.74%
8.18%
-4.21%
8.61%
3.19%
-1.10%
7.17%
2.20%
3.68%
-0.40%
3.17%
-2.24%
-1.87%
-2.88%

FINANCIAL MANAGMENT
54.
Aug 31, 2011
55.
Sep 30, 2011
56.
Oct 31, 2011
57.
Nov 30, 2011
58.
Dec 31, 2011
59.
Jan 31, 2012
60.
Feb 29, 2012
61.
Mar 31, 2012
62.
Apr 30, 2012
63.
May 31, 2012
64.
Jun 30, 2012
65.
Jul 31, 2012
66.
Aug 31, 2012
67.
Sep 30, 2012
68.
Oct 31, 2012
69.
Nov 30, 2012
70.
Dec 31, 2012
71.
Jan 31, 2013
Average:
Standard Deviation:

26
53.19
51.90
56.72
58.90
59.76
61.36
59.08
61.20
58.91
65.82
69.72
74.43
72.60
73.80
75.02
72.02
68.23
69.95

0.37

0.37

0.40
0.40

0.40

0.40

1.60%
-2.43%
9.29%
3.84%
2.08%
2.68%
-3.72%
4.26%
-3.74%
12.40%
5.93%
6.76%
-1.92%
1.65%
1.65%
-4.00%
-4.71%
2.52%
0.82%
4.67%

7,528.39
6,791.65
7,563.38
7,484.50
7,477.03
7,838.48
8,113.24
8,206.93
8,119.06
7,463.96
7,801.84
7,863.93
8,014.93
8,251.00
8,221.40
8,260.43
8,443.51
8,894.71

-6.82%
-9.79%
11.36%
-1.04%
-0.10%
4.83%
3.51%
1.15%
-1.07%
-8.07%
4.53%
0.80%
1.92%
2.95%
-0.36%
0.47%
2.22%
5.34%
0.13%
5.71%