Running Head: FINANCIAL MANAGMENT1

Investment Analysis and Recommendation Paper[Name of the Writer]

[Name of the Institution]

Investment Analysis and Recommendation Paper

Introduction

Sam Walton renowned businessman launched Walmart on July 2, 1962, in Rogers which opened the doors for people to save money and live better! Sam Walton initiated Walmart with one store in Rogers and today Walmart is operating more than ten thousand retail units under sixty nine different banners in twenty seven countries. Almost two million hard working associates are serving for two hundred million customers. Walmart has great growth pattern and it is making a difference in its approaches comparatively to its competitors. In the fiscal year 2012 Walmart delivered strong financial performance and increased its net sales by 5.9% to $443.9 billion, (Annual Report, 2012). The operating income of Walmart is increased by 4% to $26.6 billion. The earning per share of Walmart is increased from $4.18 to $4.54 from preceding year (Annual Report, 2012, http://www.walmartstores.com/sites/annual-report/2012/WalMart_AR.pdf). Walmart added 52.2 million square feet by 1160 supplementary units which includes various acquisitions in South Africa and United Kingdom. Walmart delivered $11.3 billion exceptional returns to the shareholders by giving them stock dividends. Walmart is conducting its business operations strategically and making exceptional business progress.Walmart U.S. believes in hard work and it is investing in lower prices and making real improvements in merchandising and operations. Positive sales increments are giving high returns on investments and equities. Walmart has never focused price leadership as Walmart believes in serving rather than making huge amount of profits by charging high prices of the goods and services. Walmart believes in cost effectiveness and it initiated to invest $2 billion in prices by expenses reductions and making productivity enhancements during the next coming up years.Walmart international is achieving exceptional sales targets and achieved $125 billion sales. Walmart is among top three world largest retailers. Walmart is focusing to increase the profitability in China and Brazil especially because Walmart is not achieving high profitability from over these countries. Walmart has initiated Powered by Walmart as initiative to strengthen the productivity and diminishing the extra expenses. There is no suspicion that Walmart has proved itself as best positioned global trading retail stores. Discussion

Wal-Mart Stores, Inc. (Walmart) is operating various retails stores in different formats around the world. The companys philosophy of pricing is Every day low pricing EDLP. The company is running in three different business segments, Walmart International, The Sams Club and Walmart U.S. during the fiscal year 2012, Walmart U.S. segment accounted for 60% of its net sales in operating retail stores in 50 states of the United States. Walmart international is mainly generating income from 26 countries. Sams club segment is consisting of warehouse membership clubs operating in 47 states in the United States and Puerto Rico. Online retailing operations have also contributed for approximately 12% of its net sales.Walmart is operating retail stores in different formats worldwide, it operates apparel stores, warehouse clubs, retail stores, restaurants, supermarkets, discount stores, supercenters and neighborhood markets. Walmart significant five strategies are making it a global leader these are developing people, driving the productivity loop reinvigorating customer-focused culture, leading on social sciences and winning in Global e-commerce.Walmart main points of focus are growth, profitability and leverage (Annual Report, 2012);

1. Profitability/Returns: Walmart is further looking for potential investors so that it may expand further and invest into new business segments and strategic business units.2. Leverage: For attaining leverage Walmart initiated Powered by Walmart approach which aims at reducing the cost of expenses and enhancing the profitability of the company.3. Growth: Walmart is looking to invest and expand its chain of stores into metropolitan areas domestically and purchasing the international brands internationally so that it may grow deep down the market and gain exceptional profits. Industry Analysis and Macroeconomics

The primary competitors of Wal-Mart in North America are department stores for instances ALCO stores Inc., Big Lots, Costco Wholesale Corporation, Family Dollar stores, inc., Dollar General Corporation, The Bon-Ton Stores, Inc., Tuesday morning corp., and Meijer, Canada's Zellers, The Real Canadian Superstore Kmart, Target, ShopKo. Walmart Sam's Club competitors include smaller BJ's Wholesale Club chain and Costco (Forbes).In the segment of grocery business, Walmart has to compete with numerous retailers for instances; Dollar General Corporation and Family Dollar stores. As Wal-Mart shifted into the business of grocery in the late 1990s here also it set chief supermarket chains in both the United States and Canada (Forbes).The profitability of Walmart is increased from $30000 in 1962 to $15.8 billion in 2012. Walmart returned $101 billion to shareholders by giving dividends and share repurchases. The sales revenue from $250,000 in 1962 increased to $443.9 billion in 2012. Operating expenses are leveraged in the fiscal year 2012 and 2011. The operating expenses of Walmart increased from 4.8% comparatively to 2011. Operating expenses of Walmart are growing but at slower rate which is a positive sign for the company and moreover company is focusing to reduce these expenses. Return on Investments ROI is one of the most significant metric to share it with the investors so that investor may have a clear idea about how effectively Walmart is managing and utilizing its current and non current Assets. The return on Investment grew to 19.2% from 18.6% in the fiscal year 2012. Global e-commerce and inventories have increased the operating cost but the price of investments will be covered by full realization and achieving maximum profitability. Return on investment of Walmart although increased but this incremental have been off set due to acquisitions. Return on Investment is considered as non-GAAP financial measure which is 18.6% (Annual Report, 2012) and 19.2% in the year of 2011. Return on assets is 8.8% which was 9.1% in the year of 2011

The trend analysis of the company reveals that profitability of the company is increasing consistently from 2006 to 2013 and the trend indicate that it will further increase ahead till the year of 2015 if the economic factors remain the same.Capital Market AnalysisMarketCOSTWal-MartTGTIndustry

P/E Ratio (TTM)1723.0413.2315.6320.09

Dividend Yield1.681.421.31.47

Payout Ratio36.0326.429.0320.018.19

Price to Sales Ratio3.54.38.49.64.52

Price to Earnings Ratio25.9723.0413.2515.6315.08

Price to Cash Flow Ratio22.0310.797.747.528.31

The dividend yielding of the share of Walmart is 2 which a positive sign from the investment perspective and in future company expect that its share yield will increase. The price to cash flow ratio is 7.74 which is almost equivalent to the industry average it indicates that Walmart has enough liquidity to maintain and clear out its financial obligations and the sequential flow of cash is consistent.

Financial Analysis

The growth and financial ratios of the Walmart store indicates that company is having sound financial positions. The gross profit margin percentage is increasing from 23.2 2004 to 24.9 2013. The operating income of the company is increasing from $15025 (2004) to $26558 (2012). The operating margin percentage is maintained from which 5.9 and it is one of the biggest aspects that in spite of variable economic factors company is maintaining the operating margin. The net income of the company is also increasing from $9054 (2004) to $15699 (2012). The book value of per share of Walmart is also increasing from $10.08 (2004) to $21.44 (2012). The working capital which is the difference of current Assets and current liabilities indicated that Walmart is having working capital deficiency and it current assets are not enough to meet the current obligations. The financials of the company from the fiscal year 2004 to 2013 indicated that company is maintaining good financial position however short term issues are still there but majorly company is has strong financial position in comparatively to industrial average.

The financial leverage of the company is 2.41 (2004) to 2.71 (2012) which indicates that the riskiness of company is maintained and the company is utilizing the borrowed funds (either from financial institutions or from banks) and maintaining good financial structure. The debt and Equity financing of the company is balanced and company is looking to go for equity financing more rather than debt financing.

The operating cash flow is increasing. Years over years are frequently used by investors to assess the financial health of the organization and from 2004 to 2013 Walmart is progressing by exceptional volume. The free cash flows to sales percentage ratio is 2.71 in the year of 2013 which indicates that company is making progress and the cash flow is generating by every single unit sale which adding more financial value to the company.

Liquidity Position of Walmart

The liquidity position of Walmart indicates that company has not enough cash to meet its current obligations and current liabilities are more than current assets, The current ratio trend of the company is indicating that the liquidity position of the company is getting weaker which may become severe in future. The quick ratio of the company is indicating that the quick assets of the company are not enough to meet the current obligations of the company. Therefore Walmart essentially focus on the capacity building and consider the liquidity position by adding more current assets. Walmart is fundamentally a retail store which must have to deal in inventory therefore it is recommended that Walmart must have enough inventories to maintain its liquidity position plus stock levels. The debt to equity ratio of the company is stable and it is in increasing trend which means that Walmart is having enough equity to meet its overall liabilities and it is the positive sign for the company as this is indicating that Walmart is not merely based on debt financing but also equity based financing as well. The total worth of the company is more than the obligations which proves its sustainability and credibility. The days sales outstanding is 5 at maximum which means that companys inventory is not staying on the shelf and within the period of five days the sale of the inventory take place. It indicates that customers are highly satisfied with the Walmart products and they are interested in acquiring the companys product more comparatively to the other competitors. The cash conversion cycle of the company is working efficiently and effectively as the time period is decreasing and from the year 2004 to 2013 it has brought down from 18 to 10.The inventory is not staying for along period of time and the sales take place within few days to give the room for acquiring cash and cash equivalents.

The receivable turnover indicates that after making credit sales company recovers its employed funds within 153.89 initially at 2004 but by 2013, the companys receivable turnover has been reduced to 79.96. It is one of the remarkable achievement as far as the liquidity of the company is concerned it indicates that company is looking forward to maintain its liquidity positions. The inventory turnover of the company is 7.72 from 2004 and by 2013 it has become 8.37. The inventory turnover of the company is acceptable and it indicates that the inventory cycle of the company is very specious. The Fixed asset turnover of the company is indicating that the Walmart is that company is generating good amount of sales by employing its fixed assets with efficacy and effectively.

Stock ValuationFor assessing the investment opportunities in Walmart share it is essential to find out the Walmart shares Intrinsic Value. The common measure for assessing the shares worth fullness it is advisable to understand the level of price to earning ratio in comparison with competitors. For comparison Walmart two competitors TARGET and COSTCO price to earning ratio is calculated and shown in the graph indicating that Walmart is lagging behind from both of its competitors and the industry as whole. This is the indication that Walmart is valuation is lower in comparison with competitors. The analysis is subjective on the basis of how a investor would react after viewing its price to earning ratio. For finding the real worth of the share it is essential to find out the intrinsic value of the share. The intrinsic value is being calculated by using Dividend Discount model. Multi stage model is being used for evaluating the Walmart stock.The financial analysis of the company is indicating that, at the time of aggressive growth the dividend growth rate is 13.29% and growing by the rate of 5.84% per year. After financial analysis of the company it is considered that trend will remain continues till the next five years the discount rate beta is set 0.26.Wal-Mart Stores Inc., expected rate of return

Assumptions

Rate of return on LT Treasury Composite3.24%

Expected rate of return on market portfolio13.29%

Systematic risk () of 's common stock0.26

Expected rate of return on 's common stock5.84%

Wal-Mart Stores Inc., systematic risk () estimation

Variance(WMT)21.81

Variance(NYC)32.60

Covariance(WMT, NYC)8.44

Correlation Coefficient(WMT, NYC)0.32

(WMT)0.26

(WMT)0.78

After deciding on what growth rate discount rate must be settled. Capital Asset pricing model was used for finding out the discount rate and it is taken 0.26 as Walmart low beta does not address fully to the market risk that is faced by the investor. However, discount rate is still much lower than average but it at least better indicate the reality to a certain extent.Wal-Mart Stores Inc., required rate of return

Assumptions

Rate of return on LT Treasury Composite3.24%

Expected rate of return on market portfolio13.29%

Systematic risk () of 's common stock0.26

Required rate of return on 's common stock5.84%

Intrinsic Stock Value (Valuation Summery)Wal-Mart Stores Inc., dividends per share (DPS) forecastUSD $

YearValueDPStor Terminal value (TVt)CalculationPresent value at 5.84%

0DPS011.59

1DPS11.83= 1.59 (1 + 15.15%)1.73

2DPS22.06= 1.83 (1 + 12.26%)1.83

3DPS32.25= 2.06 (1 + 9.37%)1.90

4DPS42.39= 2.25 (1 + 6.49%)1.91

5DPS52.48= 2.39 (1 + 3.60%)1.87

5Terminal value (TV5)114.66= 2.48 (1 + 3.60%) (5.84% 3.60%)86.33

Intrinsic value of 's common stock (per share)$95.56

Current share price$73.51

The Intrinsic value of the share is $95.56 however its market current value is $73.51.Stock Chart of Ten Years

The stocks ten years chart indicates that companys share value is in increasing trend however there were declination in the period of 2006 to 2008 but later on the stock value increases and after computing the intrinsic value of the share it is considered that the share value will remain consistent and it will grow further. Investor must invest in the stocks of Walmart. The dividend per share of Walmart is increasing and in future it will be raising as the company has done various acquisitions those retailing stores will be contributing further.

The earning per share of the Walmart is in increasing trend and investors have better option to invest in expect little margin with low riskiness.

Capital Structure

Cost of Debt

For calculating the cost of debt, effective interest rates for long term debt and effective tax rate is used for finding out the weighted average cost of debt. The Walmart annual report is having tax rates and interest rates therefore the cost of debt is calculated by the formulaKD=I (1-CT).Cost of EquityBy using the dividend growth model it is estimated that growth rate of dividend is 19.08% ($0.67(1+g) 2=$0.95). The cost of equity calculated by K0= D0 (1+g)/P0 +g, D0 is the current dividend quoted at the annual report of Walmart.

ConclusionWal-Mart Stores, Inc. (Walmart) is operating various retails stores in different formats around the world. The companys philosophy of pricing is Every day low pricing EDLP. The company is running in three different business segments, Walmart International, The Sams Club and Walmart U.S. during the fiscal year 2012, Walmart U.S. segment accounted for 60% of its net sales in operating retail stores in 50 states of the United States. Walmart international is mainly generating income from 26 countries. Sams club segment is consisting of warehouse membership clubs operating in 47 states in the United States and Puerto Rico. Online retailing operations have also contributed for approximately 12% of its net sales.Walmart is having an excellent financial structure and the cost of debt is 7.27% and the cost of equity is 9.07%. The stock intrinsic value is $95.56 and its current market value is $73.51. Investor must invest into the company as the trends are demonstrating that the Walmart will be making exceptional progress ahead.ReferencesForbes Financial (2010), Forbes.com LLC 2010 Web. 17 Oct, retrieved from http://finapps.forbes.com/finapps/jsp/finance/compinfo/CIAtAGlance.jsp?tkr=wmt&tab=searchtabquotesdarkInvestopedia, Investopedia ULC 2010, Web Source http://www.investopedia.com/terms/w/wide-economic-moat.aspMorningstar, Morning, Inc. 2012 Web, 11 Oct. 2012 http://financials.morningstar.com/income-statement/is.html?t=WMT&region=USA&culture=en-USMSN, Thomson Reuters, 2010, retrieved from http://moneycentral.msn.com/news/ticker/sigdev.aspx?Symbol=WMTReuters, Thomson Reuters, 2010, retrieved from http://www.reuters.com/sectors/industries/rankings?view=size&industryCode=101The Wall Street Journal, Dow Jones & Company, Inc 2010, data available at http://online.wsj.com/public/quotes/main.html?symbol=WMT&type=usstock%20usfund&mod=DNH_SWal-Mart Annual Report, 2012, Walmart Web source. (http://cdn.walmartstores.com/sites/AnnualReport/2010/PDF/WMT_2010AR_FINAL.pdf)

Wal-Mart Corporate, 2012, Wal-Mart Incorporation; retrieved from (http://walmartstores.com/AboutUs/)

Yahoo! Finance, Yahoo! News Network 2010 Web, http://finance.yahoo.com/q/pr?s=WMT+ProfileHoovers, Hoovers Inc, 2012, Available at http://premium.hoovers.com/subscribe/AppendixWal-Mart Stores Inc., monthly rates of return

Wal-Mart Stores Inc. (WMT)NYSE Composite Index (NYC)

tDatePrice(WMT, t)Dividend(WMT, t)R(WMT, t)Price(NYC, t)R(NYC, t)

Feb 28, 200748.319,124.54

1.Mar 31, 200746.950.22-2.36%9,261.821.50%

2.Apr 30, 200747.922.07%9,627.733.95%

3.May 31, 200747.600.22-0.21%9,978.643.64%

4.Jun 30, 200748.111.07%9,873.02-1.06%

5.Jul 31, 200745.95-4.49%9,554.50-3.23%

6.Aug 31, 200743.630.22-4.57%9,596.980.44%

7.Sep 30, 200743.650.05%10,039.304.61%

8.Oct 31, 200745.213.57%10,311.602.71%

9.Nov 30, 200747.905.95%9,856.85-4.41%

10.Dec 31, 200747.530.22-0.31%9,740.32-1.18%

11.Jan 31, 200850.746.75%9,126.16-6.31%

12.Feb 29, 200849.59-2.27%8,962.46-1.79%

13.Mar 31, 200852.680.246.71%8,797.29-1.84%

14.Apr 30, 200857.9810.06%9,299.605.71%

15.May 31, 200857.740.240.00%9,401.081.09%

16.Jun 30, 200856.20-2.67%8,660.48-7.88%

17.Jul 31, 200858.624.31%8,438.64-2.56%

18.Aug 31, 200859.070.241.17%8,382.08-0.67%

19.Sep 30, 200859.891.39%7,532.80-10.13%

20.Oct 31, 200855.81-6.81%6,061.09-19.54%

21.Nov 30, 200855.880.13%5,599.30-7.62%

22.Dec 31, 200856.060.240.75%5,757.052.82%

23.Jan 31, 200947.12-15.95%5,195.79-9.75%

24.Feb 28, 200949.244.50%4,617.03-11.14%

25.Mar 31, 200952.100.276.36%4,978.987.84%

26.Apr 30, 200950.40-3.26%5,513.3610.73%

27.May 31, 200949.740.27-0.77%6,004.078.90%

28.Jun 30, 200948.44-2.61%5,905.15-1.65%

29.Jul 31, 200949.882.97%6,424.288.79%

30.Aug 31, 200950.870.272.53%6,643.243.41%

31.Sep 30, 200949.09-3.50%6,910.884.03%

32.Oct 31, 200949.681.20%6,739.45-2.48%

33.Nov 30, 200954.559.80%7,092.365.24%

34.Dec 31, 200953.450.27-1.52%7,184.961.31%

35.Jan 31, 201053.43-0.04%6,883.78-4.19%

36.Feb 28, 201054.071.20%7,035.042.20%

37.Mar 31, 201055.600.303.39%7,447.805.87%

38.Apr 30, 201053.64-3.53%7,474.400.36%

39.May 31, 201050.560.30-5.18%6,791.57-9.14%

40.Jun 30, 201048.07-4.92%6,469.65-4.74%

41.Jul 31, 201051.196.49%6,998.998.18%

42.Aug 31, 201050.140.30-1.46%6,704.15-4.21%

43.Sep 30, 201053.526.74%7,281.078.61%

44.Oct 31, 201054.171.21%7,513.353.19%

45.Nov 30, 201054.09-0.15%7,430.94-1.10%

46.Dec 31, 201053.930.300.26%7,964.027.17%

47.Jan 31, 201156.073.97%8,139.162.20%

48.Feb 28, 201151.98-7.29%8,438.553.68%

49.Mar 31, 201152.050.370.84%8,404.98-0.40%

50.Apr 30, 201154.985.63%8,671.413.17%

51.May 31, 201155.220.371.10%8,477.28-2.24%

52.Jun 30, 201153.14-3.77%8,319.10-1.87%

53.Jul 31, 201152.71-0.81%8,079.44-2.88%

54.Aug 31, 201153.190.371.60%7,528.39-6.82%

55.Sep 30, 201151.90-2.43%6,791.65-9.79%

56.Oct 31, 201156.729.29%7,563.3811.36%

57.Nov 30, 201158.903.84%7,484.50-1.04%

58.Dec 31, 201159.760.372.08%7,477.03-0.10%

59.Jan 31, 201261.362.68%7,838.484.83%

60.Feb 29, 201259.08-3.72%8,113.243.51%

61.Mar 31, 201261.200.404.26%8,206.931.15%

62.Apr 30, 201258.91-3.74%8,119.06-1.07%

63.May 31, 201265.820.4012.40%7,463.96-8.07%

64.Jun 30, 201269.725.93%7,801.844.53%

65.Jul 31, 201274.436.76%7,863.930.80%

66.Aug 31, 201272.600.40-1.92%8,014.931.92%

67.Sep 30, 201273.801.65%8,251.002.95%

68.Oct 31, 201275.021.65%8,221.40-0.36%

69.Nov 30, 201272.02-4.00%8,260.430.47%

70.Dec 31, 201268.230.40-4.71%8,443.512.22%

71.Jan 31, 201369.952.52%8,894.715.34%

Average:0.82%0.13%

Standard Deviation:4.67%5.71%