Author Topic: WMT - Walmart Inc  (Read 48838 times)

collegeinvestor

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WMT - Walmart Inc
« on: December 24, 2010, 08:33:52 PM »
What do you guys think of Wal mart as a value investment?
« Last Edit: June 07, 2011, 03:17:41 PM by Parsad »


Uccmal

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Re: WMT
« Reply #1 on: December 25, 2010, 08:48:14 AM »
GARP tending toward value

roundball100

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Re: WMT
« Reply #2 on: December 26, 2010, 05:15:35 PM »
WMT seems safe, but, would you feel it offers better value than JNJ, for instance?  What level of return are you aiming for?   

maxprogram

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Re: WMT
« Reply #3 on: December 27, 2010, 08:49:10 AM »
A writeup I did a few months back:

http://www.futureblind.com/2010/11/on-wal-mart-stores-inc/

I view Wal-Mart as a good "placeholder" position (with good payout yield: dividend + buybacks) while there aren't many great bargains in the market.

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Wal-Mart is often listed as a cheap large-cap, but is owned by surprisingly few value investors. One reason is that it’s big and well scrutinized and hence its price is more “efficient.”  This is partly true, and you won’t get stellar returns investing in Wal-Mart. But it is a cheap, well-managed company that returns cash to shareholders and should fare well under a number of different macro scenarios.

Competitive Advantages

The U.S. stores division of Wal-Mart (about 3/4 of pre-tax profit) has significant competitive advantages. To consumers, Wal-Mart’s brand represents one thing: low prices. Customers in the vicinity of a Wal-Mart remain loyal because they can be certain that they will have the lowest prices. And as long as Wal-Mart doesn’t slack off in the service and facility departments, there will be no good reason for customers to switch.

Wal-Mart can have the lowest prices because of their (1) efficient operations and (2) economies of scale. Operationally, expenses are lower because of their non-unionized workforce and other shrewd cost management (shrinkage, inbound logistics, etc.). This penny-pinching mentality has been ingrained in the company since it was founded by Sam Walton. The biggest cost advantages are from Wal-Mart’s economies of scale. The most obvious consequence is purchasing power—Wal-Mart can buy products at lower prices because they can purchase in such enormous quantities. But the biggest and most un-replicable scale advantage is geographic concentration. Wal-Mart has a “hub and spoke” system of a distribution centers with 100-150 stores around them, all within about a day’s drive. Because of this concentration, costs can be distributed over a larger base of potential customers: distribution, advertising, regional management, etc. Wal-Mart also has some of the most technologically advanced merchandise and logistics systems in the world. This is something that smaller or more spread-out retailers can’t match.

Capital Investment

Wal-Mart has turned their inventory at a faster rate for each of the past 7 years. This is due to better inventory management and logistics, which have allowed Wal-Mart to decrease their inventory per square foot to around $35, giving them an inventory turnover of 12x. This compares to turnover of 13-14x for Costco and 9x for Wal-Mart a decade ago. Return on inventory (margins * turnover) is at an all-time high. This, along with a slightly higher payables period, has turned working capital into a source of capital instead of a use of it.

Recent pre-tax ROIIC (return on incremental invested capital) is about 20% for the entire company, which includes lower-returning international acquisitions. Figures aren’t broken out perfectly, but I estimate that ROIIC for the Wal-Mart Stores division is around 30% with the International and Sam’s Club divisions at 10% and 14%, respectively. These returns once again reflect Wal-Mart’s advantages in the U.S. and their troubles replicating those advantages overseas.

Valuation

Though the price has been up over the past 3 months, free cash flow yield on equity is still around 6-7%, most of which is returned to shareholders through dividends (2.2% yield) and share buybacks (2-3% a year).  Current valuation is also lower than historic multiples. In fact, earlier this summer when shares hit $48, trailing EV/EBIT was 8.6x, the cheapest multiple Wal-Mart has traded at since 1985.

$55 * 3,636.5m shares + $37.8b net debt = $237 billion EV
Trailing EBIT = $24.8b; EV/EBIT = 9.6x

Sum of parts valuation:

$33b – Walmex stake (Market value of $48b, 68.5% stake)
$30b – Other International (10x pre-tax FCF)
$14b – Sam’s Club (11x pre-tax, vs. 10x for BJ and 13x for COST)
$240b – Wal-Mart Stores (15x pre-tax)
($38b) – Net debt
$279b equity value ($77/share)

Growth

U.S. stores are still being reformatted and converted into Supercenters: the percentage of stores in the Supercenter format is 74% versus 28% a decade ago. Also, the Neighborhood Market (NM) concept, which is basically a stripped-down grocery store, is still slowly being rolled out. Both should take share from lower-end grocery stores, and grow square footage 3-4%/year with another 1-2%/year growth in sales per square foot.

As for location growth, it’s hard to picture that many more Wal-Marts in the U.S. But there is still some opportunity here. In their home state of Arkansas, there is one Wal-Mart store for every 32,000 people. With NM’s that number could probably go lower, but that’s just about saturated. A bigger state like Texas has about 66,000 people per store which I figure is a reasonable goal for other areas. To push California to that figure, they’d have to open around 400 stores. To push other states to that level would add another 900. Wal-Mart has historically had trouble with major metropolitan areas like NYC, but that may change as they experiment with NM’s and smaller store formats.

Most new growth for the overall company will come from the International division. Within International, organic growth in emerging markets (South America and China) offers the best opportunities. The biggest segment is Wal-Mart Mexico (Walmex), which now includes Central America, with 2,122 stores. Walmex’s operating income has more than doubled over the past 5 years to $2 billion, and is growing 13% a year.

The biggest risk here is achieving low return on investment in new markets, primarily in growth through acquisitions. They haven’t done well in that regard over the past 5 years, the reason being they have no real advantages in starting or acquiring new companies far from their dominant U.S. business. They recently made an expensive offer for Massmart, a dominant South African discounter, and are bidding on a retailer in Indonesia. Hopefully they will be more disciplined in the future regarding expansion into new areas overseas.
Twitter: @maxolson @explorists

woodstove

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Re: WMT
« Reply #4 on: December 27, 2010, 12:41:34 PM »
Hi Maxprogram,

I appreciate your posting your thoughts re Walmart.  I'm no longer holding, but there is some operational terminology in Walmart's press releases that I've wondered about.  Perhaps with your study of Walmart you understand what they are saying?  In their August/10 press release, for instance, they said...

"We continue to focus on our priorities of growth, leverage and returns. ... Our teams leveraged operating expenses for the third consecutive quarter, through their commitment to the productivity loop."

What does it mean to "leverage operating expenses"?  Is that like your illustration of sharing distribution costs by clustering stores?

And what is the "productivity loop", as something that employees can be committed to?  Is there a concept being trained to people?

Thanks for any light you can shed on Walmart's operational culture.

beerbaron

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Re: WMT
« Reply #5 on: December 27, 2010, 01:27:10 PM »
"We continue to focus on our priorities of growth, leverage and returns. ... Our teams leveraged operating expenses for the third consecutive quarter, through their commitment to the productivity loop."

If you want my opinion it never means anything. If an educated person can't understand a sentence then that means the person that wrote it did not want you to understand. It sound neat... but seriously what's a productivity loop, and why not explain it in simple terms for the shareholders?

BeerBaron

ERICOPOLY

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Re: WMT
« Reply #6 on: December 27, 2010, 01:39:24 PM »
I went to Google and searched on the phrase:  "What is a productivity loop?"

http://intellacore.blogspot.com/2009/10/productivity-loop.html

Take Wal-Mart as an example. It sells similar products as its competitors, yet it is more successful than its competitors. The Wal-Mart and Kmart in the same shopping complex do not compete against the each other. Instead, the supply chains of each company compete against each other. How? Wal-Mart has always focused on improving sales, cutting costs, achieving greater efficiency in distribution, and using innovative IT tools. All of these strategies allow Wal-Mart to lower prices. Additionally, the company has a bigger supply chain, with more suppliers, and then has more opportunities to bring customers into their stores. Therefore, Wal-Mart is more competitive. This example illustrates the productivity loop - lower costs, then lower prices, sell more, and then increase profits.

maxprogram

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Re: WMT
« Reply #7 on: December 27, 2010, 01:48:49 PM »
Woodstove:

Definitely some “corporate speak” going on there, so I can only make an educated guess.

I believe the productivity loop is their term for the cycle of (lower costs > lower prices > higher sales). (Edit: Ericopoly's post also illustrates this.)

As for “leveraging operating expenses”, I’m not quite sure. Despite how efficient their logistics and supply operations already are, there is still a fair amount of improvement remaining especially with advancements in technology. For example, they are taking over distribution for their suppliers, which takes advantage of their geographic concentration I mentioned and reduces costs. The CEO of the US Division is very engineering-oriented, from what I hear. If you read the annual letter to shareholders there’s more on this, but I think “leveraging operating expenses” could simply mean increasing expenses at a slower rate than sales.
« Last Edit: December 27, 2010, 01:50:20 PM by maxprogram »
Twitter: @maxolson @explorists

woodstove

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Re: WMT
« Reply #8 on: December 27, 2010, 02:22:18 PM »
Thanks!  That's ok with me, if they have corporate-speak as an efficient way of communicating a concept.  But I hope it gets explained to shareholders!  The descriptions sounds sensible.  Good idea, Eric, to go to the internet!

ERICOPOLY

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Re: WMT
« Reply #9 on: December 27, 2010, 06:44:26 PM »
Thanks!  That's ok with me, if they have corporate-speak as an efficient way of communicating a concept.  But I hope it gets explained to shareholders!  The descriptions sounds sensible.  Good idea, Eric, to go to the internet!

I had no idea either -- I agree, why not just speak plainly.