Walmart has long been a part of my portfolio, you would be hard pressed to find a company with more stable earnings and as solid an outlook as this. But that doesn’t mean it’s good value. When I first bought it, it didn’t have the greatest discount to intrinsic value but it was fairly valued. Now is time to re-evaluate the business based on the latest results.
Net sales up 5.4% in the first 9 months of fiscal 2013
Income before tax was up 6.6% over the same period.
Cash returned to shareholders has represented around 74% of net income over the last 10 years. This is greater than the free cash flow generation due to the increase in borrowings. However this does not concern me as their borrowings still remain at a very modest level.
Outlook & Value
Walmart has been growing revenues for the last 50 years and shows no signs of slowing, however the rate of growth is starting to slow, understandably given it’s size. I would suggest an increase of 5% for the next 5 years would be a conservative assumption, and 3% for the 10 years after. Using the PE ratio tool this gives a PE of 17 using a discount of 8%. I am using 8% given the current interest rate climate and the fact that Walmart has unrivaled earnings stability. If they can manage 5% growth for 10 years and then 3% growth for 10-20 this gives a PE ratio of 20.
However this needs to be adjusted for reinvested earnings, as I said only 74% is returned to shareholders. This means WMT is actually worth a PE of 12.6 to 15. Their TTM PE ratio is currently 14.6 which puts them quite high in terms of my valuation. Not a good time to buy in my opinion, but is it the time to sell?
I currently have a lot of cash on the sidelines, so have decided to hold this position until a better opportunity arises and I need the cash. At what point would I exit? I would actually only exit in the event of an overvaluation in the order of a PE of 18. For me WMT is a safer long term holding in my portfolio.
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