We looked at Walmart and compared it to Amazon.com almost a year ago. The analysis is available at the following link.
In the one year, Walmart has remained stagnant with a lot of negative press and stagnant earnings. The earnings have remained stagnant as Walmart has started pulling out of markets such as Germany where it hasnt been successful. The special charges for discontinuing operations have caused the earnings thus far this year to be somewhat lower than last. Amazon on the other hand has declined from a higher price of $45 to a lower price of $38. Amazon.com still looks pricy and has room to move lower. In this article, we will look at the fortunes of Walmart and see how does it look from an investment view point.
For the first nine months of 2006, the top line revenue growth at Walmart increased by 11% compared to 2005. The operating margin for the first nine months of 2006 is 5.7%. This compares to the operating margin of 5.81% in 2005. The decline in margins is slight and was expected as Walmart tried to increase its same store sales. The company has taken a charge of 894 million to withdraw from unprofitable markets that is expected to be a one time event. As a result of this charge, the bottom line growth is about 6.4% - this excludes the per share loss from discontinued operations.
The share holders equity year over has increased by 17.7% and has increased by 10.5% in the first nine months of the year. The international sales made 22% of the sales volume for Walmart and is also the fastest growing segment. Although Walmart had to close its German and South Korean operations, it is expanding in South America, Japan and China. It also has plans to enter the Indian market through a joint venture with an Indian company.
Walmart's international operations increased by 30% year over year. Walmart's domestic sales increased by 8% year over year. Sam's club was comparitively stagnant with a growth of 4.5% year over year. Although Walmart's gross margin increased year over year, it didnt translate into the bottom line. The capital expenditures by Walmart were about 11 billion dollars while the amortization is about 4 billion dollars. This means the company is spending more money on expansion.
Looking at the last five years, EPS has increased at the rate of 9% per year. The return on assets has been somewhat lower at 8 and 9% respectively. The return on equity has been doing good at around 20%. The company gives away 25% of its earnings as dividends. The top line growth will probably be in the high single digits at around 8-9% per year with bottom line increases in low double digits - in the 10-12% per year for the next five years. This would mean EPS growth to about 4.7 dollars at the low end and 5.15 dollars at the higher end. A P/E of 15 would value the stock between $70 and $77 respectively. A return of about 40 - 45% over the next six years should be possible for this stock and especially fiscal 2008 should be good as the one time 800 million charge will not be in the books.