After some in-depth research, I have decided to take a position in Wal-Mart. My views are summarized by a still growing business, a company that will not be hit as hard should we see a recession (note: I have no idea if we will have one or not), and an ever growing dividend. So without further ado, here is why I am buying WMT (and NOT suggesting you do the same without your own research):
Compound Growth Rate (1996 – 2006): 13.4%
Compound Growth Rate (2002 – 2006): 9.1%
Compound Growth Rate (2005-2006): 9.5%
Although revenue growth has slowed since 1996, the firm is still growing revenues at a good pace. The lowest period of growth was 2003 – 2006 when the company’s revenue grow 8.8%. Still not too bad. According to Value Line and other research, Wal-Mart is on a international growth kick which should provide opportunities for additional revenue growth.
Based on various growth rates through various time periods, I have estimated the revenue growth rate to 2011 to be 10% – which would put revenue at $504,629 million (Man that is a big number – that is $1,382,545,205 in revenue per day).
Wal-Mart has done an incredible job growing its EPS consistently:
Compound Growth Rate (1996 – 2006): 16.5%
Compound Growth Rate (2002 – 2006): 15.6%
Compound Growth Rate (2005-2006): 10.4%
To estimate the EPS growth rates I try to use as many sources as possible. Here are the estimated that I was able to dig up:
Value Line: 12.5%
The number I chose to input was 12.5% for two reasons; to be conservative to the other estimates and I feel it reflects the more recent growth rate but provides a bit of an upside. Plugging in these numbers, I get a projected EPS of $4.79 in 2011.
If you remember when I discussed Pfizer, I look at price in terms of the historical P/E ratio compared to the current P/E ratio in order to estimate a future P/E ratio.
The overall average P/E going back to 1996 for WMT is 28.3. Like many stocks during the 1999 – 2001/2 period stocks had super high P/E’s and I think that must be factored out of the average P/E ratio somewhat. To help, I also looked at some estimates; MSN = 16.9, Morningstar = 17. With this information in hand I projected an upside P/E of 17 to be conservative. It is higher than the most recent P/E but something that I think is attainable.
When I look at return, the software package that I use provides me with an estimated upside rate of return, based on my previous inputs. It is also where I am able to see the dividend trend. In the case of Wal-Mart, they have increased their dividend 20.5% since 1996 – really good. With an estimated 1.4% dividend yield if I purchase now, my projected rate of return is 12.9%. Considering that I strive for a minimum of 12 % this is fits the bill.
Using a potential decline of 30% in the price of the stock, I can hope for a $2.43 of reward for every $1.00 of risk. Remember from my Pfizer post, anything above $3 is wicked, anything above $2 is worth investing in (IMHO).
There you have it – my rationale for purchasing WMT. I have good hopes form WMT and plan on holding this stock for a long time.
NOTE: THIS IS NOT A RECOMMENDATION TO BUY. DO YOUR OWN RESEARCH. THESE ARE MY OPINIONS AND SHOULD NOT BE CONSTRUUDE AS INVESTMENT ADVISE.