Sunday, January 14, 2007

Walmart or Microsoft?

This is a comparison of Walmart and Microsoft to see which one is a better bet for the nex five years. If we are expecting 10% return per year for the next five years for 50% total return, the stock price apprecition would be as follows:


31 * 1.5 == 46.5


47 * 1.5 == 71

Let us look at the top line growth - Walmart is growing at a rate of 8% at the top line where as Microsoft is growing the topline at 7% per year.
Looking at the bottom line, both Walmart and Microsoft have grown at around 9% per year.

However, Walmart's free cash flow has increased year over year and by about 25% in the past five years. Microsoft's cash flow has declined or remained the same in the past five years. This year, Walmart has taken a special one time charge of 850 million to get out of the German and South Korean markets. This will not show up in the balance sheets next year.

Lastly, let us look at the margin of safety provided by the two stocks. Walmart provides about 20% margin of safety where as Microsoft provides no margin of safety at current prices.

1 comment:

Roger said...

Microsoft has new products this year which should grow its top line faster than it has historically.

When this happens, Microsoft will expand margins as well. Their new products are in their highest margin divisions. Hence a greater percentage of their revenue will fall to the bottom line.

Also they are buying back shares which will have their EPS grow faster than their top-line.

I think your estimation is very low. For both companies.