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Drug Stores: Walmart

Drug Stores: Walmart

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Drug Stores: Walmart

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Presentation Transcript

  1. Drug Stores: Walmart : The final countdown • to the final valuation • of ultimate destiny Eric Biro

  2. Industry at Large • Walmart – retailer, 15% of net sales in 2 divisions from health and well-being • Express Scripts – PBM • Walgreens – pharmacy • CVS/Caremark – PBM and pharmacy

  3. Valuation Method • Reformulate balance sheet/income statement • Adjust for off-balance sheet accounts • Determine line-by-line growth rates from 2014 to 2015 • Use growth rates/judgment to project to infinity and beyond! (okay, just 2024) • Forecast using NEA, EPAT • Value firm • ??? • PROFIT (through the purchase/sale/holding of shares)

  4. NEA with Adjustments

  5. EPAT with Adjustments

  6. Sales Forecast • Based on historical company results • 10-K and MD&A • Intl. acquisitions, FCPA, inefficiencies • Earnings call • Analyst predictions • Walmart • Retail industry • The most judgmental – and important – part of the valuation • Includes membership income (minor effect)

  7. EPM Forecasts

  8. EATO Forecasts • ... are on the next slide since it’s too big to have a title, • but I still wanted to let you know what’s coming next, • so we have another picture • of Trevor creepily enjoying • rather large ice cream cone

  9. Full Information Forecasts

  10. Before we get WACC…

  11. Walmart is WACC, dawg. • Following valuations are very sensitive to changes in the WACC • 1% change around chosen discount rate (6.45%) changes implied share value by $40.00

  12. DCF Model

  13. Residual Income Model

  14. American Model • Whoops!

  15. Abnormal Earnings Model

  16. Buy/Hold/Sell? • BUY • Implied share price is significantly higher than the current market price • If discount rate 7.00%, implied price is $95.00, much smaller difference

  17. Rationalizations for such a massive difference Walmart’s Strengths • Why would this be such a strong buy recommendation? • Market leader in low-margin consumer products • Continuing expansion, especially international – a big part of increased sales • Increasing use of online offerings/operations • Brand name strength

  18. Where Could I Have Royally Messed This Up? • Most everywhere! There are assumptions all over the place. • If sales decline, everything could be very different, quickly • Working with large numbers, any small change makes a massive difference • Beta selection – most in the same general window • If performance drops from 2013 -> 2014 are more than just a one-year occurrence, most forecasts out the window • If international expansion/acquisitions slow, sales forecasts will be off • What’s hiding? • Over-aggregation – hard to make out potential trends

  19. Questions?