Five Year Projection: $82/Share
When making multi-year projections, it is best to be very conservative. Any miscalculations to the upside is simply a bonus. As such, we outline a five-year projection for Walmart stock at $85/share.
As of January 2012, Walmart is trading roughly around $60/share with a P/E ratio at 13.4. This is in line with the industry average of 13.6 and the S&P 500 average of 13.7.
The P/E for Walmart has been steadily dropping for the last decade. This has been a combined of earnings growth, share buybacks, and a lack of performance in the broad stock market indices (the S&P is essentially flat over the last decade).
Walmart has grown net income steadily over the last decade. The growth rates are as follows:
- 3-Year Average: 8.78%
- 5-Year Average: 7.85%
- 10-Year Average: 10.04%
EPS growth has also been steady:
- 3-Year Average: 12.61%
- 5-Year Average: 10.77%
- 10-Year Average: 12.31%
For the next five years, we project a conservative EPS growth rate of 9% annually. Walmart reported FY2011 EPS of $4.18. FY2012 EPS guidance has been reiterated in the $4.45 to $4.51 range as of Nov 2011). which would be a growth rate of 6.5%-7.9% from the previous year.
In October of 2011, Walmart announced a five year initiative to “reduce operating expenses as a percentage of sales by more than 100 basis points over the next five years.”
Our view is that by continued efficiency and operating expense reductions over the years, international sales growth and continued improvement in US stores, Walmart should hit 9% annual growth for EPS. Further share buybacks will also be a tailwind in EPS growth.
Our conservative EPS estimates would look like the following:
- FY2012 (ends spring 2012): $4.45/share
- FY2013: $4.85/share
- FY2014: $5.29/share
- FY2015: $5.76/share
- FY2016: $6.28/share
- FY2017: $6.85/share
If we use a conservative multiple of 12, we get $82.20 as an estimated share price. This would imply an annual growth rate of 6.45%. Note: This doesn’t factor in dividend yield.
Factoring in dividend yield, it is likely that an $82 price target in five years would yield a total return of approximately 9% annually for the next five years. This is a very conservative estimate, and there are very few investments with as low a risk as Walmart, the operational track record of Walmart and the record of returning value to shareholders. We believe Walmart is a great low risk investment moving forward.
Obviously, the path to $82/share won’t be a straight line. With record correlations in the stock market, volatility is here to stay it appears. It is our view that patience will be rewarded as investors wait for selective buying opportunities. By acquiring shares at $55, the annual compounding rate jumps from 6.45% to 8.32% not including dividends. Entry point can be a main factor in whether or not your portfolio outperforms the market.
We will continue to track this projection and update you with Walmart’s progress with regards to earnings growth and stock price performance.