Walmart Inc. (WMT)

Conclusion

Walmart Inc. operates retail and wholesale stores and clubs, ecommerce websites and digital payment platforms across three segments: Walmart U.S., Walmart International and Sam's Club U.S. At the latest price of 125.66 USD, its market capitalisation is 1.00 trillion USD.

The verdict is overvalued. The price-to-earnings ratio is 45.3 against a ten-year median of 30.1, and the enterprise value to EBITDA ratio is 22.7 against a median of 13.8. The fair value band runs from 37.17 to 55.75 USD with a midpoint of 46.46 USD, a margin of safety of -63.0% at the current price. The DCF gives 31.44 USD per share; the fair value from historical multiples is 61.48 USD. The reverse DCF implies revenue growth of 22.8% a year, while revenue grew 5.0% a year over five years and free cash flow per share fell 9.3% a year over the same period.

What supports the case is the quality of the business: a Piotroski score of 7 out of 9, a return on invested capital of 14.9% against a weighted average cost of capital of 8.5%, and an Altman Z-score of 6.4105. The weakest numbers are the current ratio of 0.7671, the free cash flow yield of 1.35% and the price-to-free-cash-flow ratio of 74.0 against a median of 27.5. A slowdown in earnings growth or a fall in free cash flow would leave little room under the current price.

Financial health

The financial strength is yellow: the Altman Z-score, net debt to EBITDA and interest coverage are assessed good, while the current ratio is assessed bad. The current ratio is 0.7671 and the quick ratio is 0.1955. Net debt to EBITDA is 1.3306, debt to equity is 0.7508 and interest coverage is 13.4484.

The Altman Z-score is 6.4105, in the safe zone. The Altman model was designed for manufacturers, and Walmart is a retailer, so the result is indicative only. Insolvency risk: low, about 0.3% by the estimate of the Ohlson model over one to two years. Over five years, debt has fallen 3.8% a year relative to revenue growth, and interest coverage is comfortable. Liquidity is the main weak point, because short-term obligations exceed current assets.

Earnings quality

The earnings quality is green, supported by a Piotroski score of 7 out of 9 and a share count that fell 1.3% a year over five years, which points to buybacks. Free cash flow conversion is 61.2% on a trailing twelve-month basis, against 80.3% on a five-year average, so recent cash generation has lagged reported earnings. The accrual ratio is -0.0721, which indicates that cash earnings are above reported earnings.

Stock-based compensation to revenue is not available, because the company's stock-based compensation figure is missing from the data. Free cash flow after stock-based compensation is 13.51 billion USD on a trailing twelve-month basis. The Beneish M-score is not available. The company beat earnings estimates in five of the last eight quarters, with an average surprise of 6.1%. Estimates for the current year were revised down 0.5% over 90 days, and estimates for next year were revised down 1.7%, with six downward revisions in the last 30 days against one upward.

Profitability

The profitability is yellow: return on invested capital against the cost of capital and the operating margin against its median are assessed good, while the operating margin itself is assessed bad. The gross margin is 25.2% against a ten-year median of 24.9%. The operating margin is 4.4% against a median of 4.2%, and the net margin is 3.0% against a median of 2.4%. The operating margin has a stability measure of 8.3%.

Return on invested capital is 14.9% against a weighted average cost of capital of 8.5%, giving a return on invested capital minus cost of capital of 6.4%, which the data classifies as value-creating. The five-year median of return on invested capital is 13.1%. Return on equity is 22.5%, but the DuPont split shows that it is inflated by leverage: a net margin of 3.07%, an asset turnover of 2.51 and an equity multiplier of 2.86.

Growth

The growth is green, supported by earnings per share growth and by revenue growing in each of the last ten years. Revenue compound growth is 5.3% over three years, 5.0% over five years and 4.0% over ten years. Revenue grew in all ten comparable years.

Earnings per share compound growth is 24.2% over three years, 11.5% over five years and 6.0% over ten years. Free cash flow per share grew 7.6% a year over three years, but fell 9.3% a year over five years and rose only 1.1% a year over ten years. The data shows next year's earnings per share growth estimate at 11.8%, though estimates for the coming year were revised down.

Valuation

The valuation is red, because the verdict is overvalued and the margin of safety is assessed bad. The price-to-earnings ratio is 45.3 against a ten-year median of 30.1, a premium of 50.5%. Enterprise value to EBITDA is 22.7 against 13.8, a premium of 65.1%. Price to free cash flow is 74.0 against 27.5, a premium of 169.1%. Price to sales is 1.36 against 0.66, a premium of 104.4%. Price to book is 10.2 against 4.3, a premium of 138.8%.

The DCF gives 31.44 USD per share, using a discount rate of 8.87%, five-year growth of 5.0% and terminal growth of 2.5%. About 56.2% of that value comes from the terminal value. The fair value band runs from 37.17 to 55.75 USD with a midpoint of 46.46 USD, a margin of safety of -63.0%. The reverse DCF implies growth of 22.8% a year, against five-year revenue growth of 5.0%. The fair value is an order-of-magnitude estimate built on fixed assumptions, not a price target. The dividend yield is 0.77%, and the dividend absorbs 57.0% of free cash flow.

Risks

The weakest numbers are the current ratio of 0.7671, which means short-term obligations exceed current assets, and free cash flow conversion of 61.2%, which would weaken the balance sheet if it stays low. A fall in the price-to-free-cash-flow ratio towards its median would reduce the premium to the market price, which is the main valuation risk. A fall in free cash flow per share, already down 9.3% a year over five years, would weaken the buyback-supported share count.

Stock-based compensation to revenue and the Beneish M-score are not available, so the analysis cannot test the earnings for manipulation or dilution from equity awards. The analysis has no debt maturity schedule and no revenue breakdown by segment, so refinancing risk and the contribution of each segment to growth cannot be assessed. The Altman model is not designed for retailers, and the fair value depends on fixed assumptions, so both should be read as indicative.