Wal-Mart Case Study Part 3


Part 3:Valuation of WMT,

Part 2:  http://wp.me/p2OaYY-2nB and

Part 1:  http://wp.me/p2OaYY-2np

Stock Splits

Wal-Mart Stores, Inc. was incorporated on Oct. 31, 1969. On Oct. 1, 1970, Walmart offered 300,000 shares of its common stock to the public at a price of $16.50 per share. Since that time, we have had 11 two-for-one (2:1) stock splits. On a purchase of 100 shares at $16.50 per share on our first offering, the number of shares has grown as follows:

2:1 Stock Splits Shares Cost per Share Market Price on Split Date Record Date Distributed
On the Offering 100 $16.50
May 1971 200 $8.25 $47.00 5/19/71 6/11/71
March 1972 400 $4.125 $47.50 3/22/72 4/5/72
August 1975 800 $2.0625 $23.00 8/19/75 8/22/75
Nov. 1980 1,600 $1.03125 $50.00 11/25/80 12/16/80
June 1982 3,200 $0.515625 $49.875 6/21/82 7/9/82
June 1983 6,400 $0.257813 $81.625 6/20/83 7/8/83
Sept. 1985 12,800 $0.128906 $49.75 9/3/85 10/4/85
June 1987 25,600 $0.064453 $66.625 6/19/87 7/10/87
June 1990 51,200 $0.032227 $62.50 6/15/90 7/6/90
Feb. 1993 102,400 $0.016113 $63.625 2/2/93 2/25/93
March 1999 204,800 $0.008057 $89.75 3/19/99 4/19/99

So the price on August 1974 when a 2 for 1 stock split occurred was $23.

What price would I have paid? I would see 38% ROE with little debt ($10.5 mil.) with 40%+ growth. If I paid 4 times the book value of approx. $31 mil. Plus the debt of $10.5 million ( I would not subtract the cash since I assume it is all needed as working capital) or $124 mil. plus $10.5 mil. or $135 million. Divide by $6.542 mil. shares or $20.63 per share or $21 to round up. $23 to $25 was near the highs for 1975 in the fourth quarter but the price was below $20 in the first quarter of 1975. Could I have bought right after the largest decline in stock market history after the Great Depression and with inflation raging? If I knew the value and rarity of an emerging franchise perhaps. But I doubt it.

I would have paid 4 times book value (better is replacement value but this is back of envelope investing) to garner a 9% return but the long term growth of 5% to 6% would give me my required 15% return. Obviously, if I had paid double, that would have been fine.

The key is in recognizing the source of WMT’s competitive advantage and how large the market opportunity to exploit that advantage. The secret is on page 10 of the 1974 WMT annual report 1974-annual-report-for-walmart-stores-inc and on page 11 here: WAL-MART CASE STUDY on Discount Operations 1986 (email aldridge56@aol.com if that link is taken down) and ask for the case study.

Note that you would have had to hold on through thick and thin without selling on numerous “market” scares, crashes and fears.  You have the key to becoming rich in investing but now you know why investing is SIMPLE BUT NOT EASY!

If you have questions post them on this blog do NOT email them to me. Thanks.

4 responses to “Wal-Mart Case Study Part 3

  1. After looking over your approach to figure a buy price for Walmart exercise, I wanted to make sure I followed along correctly This is my understanding:

    Cash + WC= $29,370,843
    If Pay 4X Cash + WC= $117,483,372
    Add LT Debt of $10,578,269
    4x Cash + WC + LT Debt= $128,061,641

    4X Cash + WC + LT Debt/ Out Shares = $19.57/ Share

    First, did I do this correctly? Second, can you tell me why you ADDED LT Debt rather than subtract it? Third, how did you come up with 4X?

    Thanks in advance for you response.

  2. Thanks for posting this case study. I have questions similar to Michael’s. First of all, why is debt factored into the per-share valuation calculations at all? (I presume you were applying a P/B multiple to book value.)

    Secondly, I would love to know why you decided to take a book value-based valuation approach, and how you arrived at 4x for your multiple.

    Thanks very much!


  3. i assume john sees it as if he were to buy over the company at 4 times book ~ 120 mil equity and buy over the debt 10.5 mil, his investment cost wud be 130 ish. and he can still expect to earn a return of earnings yield of 9%.

    one question john, how do you account for the additional 5-6% growth returns you will get to make up the difference between ur required 15% and the earnings yield of 9%? is it because due to the difference between the growth at 40+% and ROE at 38%? not sure how this part works out.

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