Hi I'm Jimmy in this video.
I'm going to walk for my analysis of Walmart
ticker symbol WMT.
This is a twenty ninth video in our series
where we're analyzing all 30 stocks in the
Dow Jones industrial average.
We can see a link in the description below
for all of the videos.
Well we're then going to take all that analysis
we're going to build three different portfolios
a dividend value and a growth portfolio.
So let's start by breaking out last year's
revenue by segment.
So they have three reportable segments.
They have Walmart US with 64 percent.
Wal-Mart International with twenty three percent.
And then the Sam's Club gives the rest.
Now what's interesting about this particular
breakdown is that this breakdown has been
fairly consistent for a long time.
This chart this one goes back all the way
to the year 2000 and this is a breakdown of
these three reportable segments as work as
they contribute to revenue.
So this the percentage contribution to revenue
chart now I bring this out early in the video
because Walmart has made it very clear that
they want to grow their international business.
And I found this chart interesting because
I would have thought that Walmart International
would have gained more ground on the very
mature Walmart U.S.
Now we can see that there were a few years
right there that the international business
did well versus the U.S. business.
But then it gave it back in the past couple
of years.
And we're left it about where we start back
in 2009.
Now I just want to be clear about something.
This is not a chart of revenue.
This is a chart of revenue as compared to
each other.
So it's the total contribution to revenue.
And when I was doing my research I only created
this chart because I know that generally speaking
the U.S. economy is going to grow fairly slowly.
Call it 2 3 4 5 percent.
But when you compare that to the emerging
markets it's not very fast.
So when I was hoping and half expecting when
I created this chart was to see the international
segment picking up ground in the U.S. segment
which would imply a better growth rate than
just what can be produced in the United States.
So that's why I created this chart.
Now when we switch to an actual revenue chart
well we can see that how each segment actually
grown we can see that Sam's Club they've been
quite stagnant there the green bars at the
bottom with the international segment we can
see that they had a spike back here but then
they give it back.
Now that sort of explains the hump that we
saw in the percentage of revenue chart then
we can see the U.S. segment has continued
to grow nicely outside of that little lull
in the middle.
OK.
So now let's look a bit closer at some of
the how what's happening with Walmart now.
I think we all know what Walmart does.
They are a traditional retailer.
They've really been the king of the traditional
retailer and they've been a price leader in
almost every segment that they compete in.
Now that's one of the advantages of being
so large but with the emergence of Amazon
Wal-Mart is doing everything they can to try
to pick up ground in the e-commerce space.
In 2016 they bought jet.com Last year they
bought They bought a majority stake in Flipkart.
Walmart also owns a 10 percent stake in JD.Com
but Flipkart just happened.
So and there's also some very interesting
things happening with Flipkart.
So let's focus there for a second.
So last year Walmart goes out and buys a majority
stake in Flipkart for about 16 billion dollars.
And for those who aren't aware of what Flipkart
is.
Well essentially it's like the Amazon of India.
Now that's one of those emerging economies
that I was talking about that could lead to
great growth for the International segment.
Well Flipkart was started by two Amazon employees
and they have more than 30000 employees and
about three billion dollars in revenue.
Well in February of 2019 the government of
India made a ruling to essentially try to
level the playing field for their local retailers.
And it really limits Flipkart ability to do
business the way that they were doing it.
It will affect their ability to do pricing
ability to buy stakes in other retailers.
So essentially this is going to make a lot
more difficult for Walmart to do business.
Now I believe that right now in India the
various phases of the Indian election are
happening and depending on the results of
those elections well that could drastically
influence Walmart’s ability to make money
after from the Flipkart acquisition.
So we'll have to see how all of that shakes
out.
But that is potential to really impact the
growth in India for Walmart.
But it's not all bad news for Walmart stock.
So let's look at just a few more numbers no
more.
Go ahead and try to value Walmart’s stock.
So we already saw a chart of revenue.
This is a chart of net income.
And as we could see it was up in 2018 but
it seems I'd say that the overall trend of
net income has been about sideways.
Now one of the interesting things about Walmart
is frankly their size.
This is a chart of total revenue.
And look at how much revenue they put up last
year they put up over 500 billion in revenue.
So to put that in perspective in 2013 Coca-Cola
put up about 32 billion in revenue.
Nike put up about 38 billion.
Target had about 75 billion.
And Amazon put up about two hundred thirty
three billion.
So I bring this out because personally need
to remember that this size is going to be
difficult.
It's going to make it difficult for Walmart
to grow at any impressive amount.
Now Wal-Mart is doing a lot to expand their
e-commerce platform which should help them
grow.
Now Flipkart was just one example of this.
In fact they have more than 11000 stores.
And I would think that that should help them
develop a solid e-commerce plan.
They're already known as masters of logistics.
So that should help them efficiently compete
with in the delivery game.
So this brings us to my humble opinion of
the future of Walmart as they go up against
Amazon.
Now I know this may sound a bit crazy but
I actually think that Amazon is going to be
a good thing for Walmart in the long run.
So here's my reasoning.
Amazon is going around wiping out all the
little niches and I'm thinking that stores
like Toys R Us now Walmart is going to get
a piece of that business.
Sure Amazon's going to get a large piece of
that business too.
But Walmart is so large and has such economies
of scale and such enormous free cash flow
that I can't I simply can't see Amazon wiping
out Walmart sure at the rate that they're
growing.
Amazon will likely one day be bigger than
Walmart is from a revenue perspective.
And then Amazon is going to have to deal with
the burden of size just like Walmart is today.
But Walmart has such economies of scale right
now and such pricing power that it's going
to be very difficult for Amazon to undercut
them for any period for any long period of
time.
It's more likely that Amazon in my opinion
is just going to go around wiping out all
of Walmart’s competition for now price wars
aren't good for any business or industry.
That's how you end up with profit margins
that look like this.
Now last year Walmart had profit margins just
short of 3 percent and Amazon wasn't much
better right around 4 percent I believe.
But Walmart does have fantastic free cash
flow.
This is a chart of free cash flow going back
about the past 10 years.
So right now Walmart’s putting up about
17 billion dollars in free cash flow this
type of free cash flow should allow for them
to take chances on companies like Flipkart
or JD.com which is doing pretty good in the
Chinese market.
And when we add analysts estimates to the
free cash flow.
Well this is what that chart looks like.
So now that we have free cash flow estimates
we can try to use that to determine the fair
value of Walmart stock.
So switching over to our discounted cash flow
valuation.
Well I calculated fair value of Walmart stock
to be about one hundred and sixteen dollars
a share.
And given that the stock is trading at about
a hundred three dollars per share right now.
Well it seems like there are some pretty decent
upside.
Now some of the most popular comments that
I get when I make videos like this is where
do I get these numbers from and how do I calculate.
And I've actually made some videos on pieces
of this process but never the entire process.
I have a video on what is free cash flow where
it comes from and how it could be used.
And I've another one on the weighted average
cost of capital.
And another piece of it which is the capital
as a pricing model as to how to help to help
you calculate it.
But I was thinking about putting together
a video on the entire process.
That's something you think would be interesting.
Let me know in the comments below.
Now there would likely be different versions
of this calculation in the video because the
way that I do it here is really a rough and
dirty way of doing it because technically
this fair value here.
Well this is a fair value for the company
and to get the true fair value of the stock.
Well you need to make some adjustments.
You'd have to adjust for cash you have to
adjust for debt and you probably wouldn't
use the weighted average cost of capital.
Instead you'd probably use the required rate
of return but since required rate of return
is tricky for me to use not knowing what everybody's
required rate of return would be.
Well it makes sense to just use do it the
way I can.
So when I do a more expensive video wouldn't
just be these numbers I would try to expand
the proper when there's a couple different
ways of doing it.
That being said for Walmart it probably wouldn't
affect it too much because Walmart’s their
cash.
They have about 41 billion in cash I got about
forty nine billion in debt so that wouldn't
be much impact of that.
And at the end of the day one of the big drivers
of this is the weighted average cost of capital.
And it was actually fairly conservative with
this weighted average cost of capital to illustrate
this.
This is a quarterly history of the weighted
average cost of capital going back to 2009
and the average WACC during this period was
about six point six percent with what I used
was the current WACC of seven point five percent.
Now if I had used the six point six percent.
Well the fair value would have jumped all
the way to 142.
And I bring this out because I think it's
important that people don't ever look at this
number and say oh the fair value is one hundred
twenty three dollars one hundred forty two
dollars as if it's somehow a fact.
A lot of this is opinion and virtually all
of it is opinion except for the historical
numbers.
That being said I think a video illustrating
how to shape that opinion to be as accurate
as possible at least the way I do it could
be useful.
All that being said I'm a big fan of Walmart
and I actually think they're going to do quite
well in the long run.
Now I recently did a collaboration video for
good stocks in a struggling economy and Walmart
is actually a great stock for that type of
environment.
Now the question for us is do we think that
this stock belongs to any of our Dow 30 portfolios.
I don't think it belongs in the growth portfolio.
I think we made that case.
I think it probably belongs in the value portfolio
and they currently have a dividend yield of
about 2 percent.
So maybe in the dividend portfolio as a stabilizer.
But that's borderline to me.
But what do you think.
Do you think Walmart’s a good investment
today or do you think that we should hold
off for to get a larger margin of safety.
Right now there's about 15 percent or so upside.
Should we wait for that to be let's say 25
percent.
Let me know what you think of the comments
below.
Thank you for sticking with me all the way
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Thanks.
