Saturday, September 17, 2005

And now, the million dollar question.. What is Wal-Mart worth? ..okay, $215 billion

I have been working on the problem for some time now, and funnily enough I created a ridiculously complicated spreadsheet which took in lots of different variables such as increasing labor costs, increasing energy costs, increasing future interest rates, increasing taxes, yada yada yada. In the end, I scrapped the puppy. Too damn complicated.

What I did notice in the exercise, though, was that the ultimate answer to this question is simply what is happening at the bottom line, i.e. what will future growth be at the net income line? (..Duh.)

I can mess around with all the variables at the operating level, the interest rate level, and the tax payment level, and cause 1 to 2% changes in the growth rate for net income.

So, here is my simplified result..

Start with FY 2005 net income of $10.267 billion
10% average net income growth rate
10% discount rate
10x multiple in year 2016.

Wal-Mart, using these assumptions, is worth $215.607 billion right now.

Current market value ($183 billion) is at a 15% discount to intrinsic value of $215.6 billion.

[No, this is not a discounted cash flow (DFC) analysis. This is a discounted net income analysis. Buffett followers would chide me for not factoring in Cap Ex and Depreciation. My answer to that is this: I have never really found it useful to do a DCF analysis on a growing retail company. A DCF analysis really is only useful for a retailer that is not going to grow in the future. I don't think Wal-Mart falls into that category. Growth cap-ex is an investment in a future net income stream, one that should be significantly higher depending on the growth rate of the company. At some point, after growth slows to zero, cap-ex will stabilize and net income will become a function of how much operating efficiency can be wrung out of the system. While a retailer is still in growth mode, you can dumb the analysis down to net income (barring anything very unusual). There is lots of growth cap-ex left to come with Wal-Mart, I know. When Wal-Mart stops growing, it'll just be maintenance cap-ex. Eventually maintenance cap-ex and depreciation will cancel each other out. I just did it now to keep things simple.]


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