Wednesday, September 2, 2009

The right price for Walmart? (WMT)

AlphaNinja - Credit Suisse is out this morning saying they don't see much upside for Walmart(WMT) shares. Among their concerns:

-->>the impact of deflation on operating strategy

-->>a gross margin focus with the P&L based less on expense leverage vs their historical growth story

These two issues come up because Walmart has taken on the US grocery industry. Kroger (KR)and Safeway(SWY) are in all-out fights for survival against the low-cost leader, and it should be no surprise that a race to the bottom in pricing will affect Walmart also.

Walmart has enjoyed a valuation premium due to their amazing operating abilities. But what if we valued them like another grocer? The EV/Ebitda for the industry is about 3.5-5.5 times, versus 7.5times for Walmart -->> implying a drop of about a third for the shares.

Free Cash Flow for Walmart runs about $9billion annually these days, restrained by hefty capital expenditures. That's an FCFY(Free Cash Flow Yield) of about 4.5%, and I cannot see that going lower (lower yield would mean higher share price). That kind of yield is for a company with tiny risks, and Walmart has plenty, including the possibility of forced unionization and the extreme pricing pressure it faces in all its categories. Not to mention the "catching-up" effect, as other companies mimic their best-in-class practices as they compete for every dollar. With those risks, maybe an FCFY of 6% is more fair, meaning a share price 20% lower than these levels. I have great respect for this company, but would agree with Credit Suisse that the shares have limited upside.

(No position in WMT)

No comments:

Post a Comment