Company project analysis: Using the analytical tools each of you will learn, each person will prepare an analysis of a public company. The company will be evaluated from the perspective of both fixed income securities (e.g., would you buy the bonds in the medium to long-term?) and equity securities (e.g., would you buy or sell the stock in the medium to long-term?).
Approaches to the analysis should include:
The company chosen is at your discretion, but should not be so complex or one for which the information is not readily available that makes it more difficult than necessary. Students should pick a subject company outside his/her usual frame of reference. For example, if a student is employed in the technology sector, he/she should choose a company in another industry, such as food.
8 pages double space. 12pt.
Introduction
This company analysis considers Walmart’s financial health and position, the leading supermarket globally in terms of revenue. The company has been in existence since 1962 and is based in Bentonville, Arkansas, in the US. From its headquarters, it coordinates 11,510 stores spread across 27 countries. The company has been listed on the New York Stock Exchange since 1974 and has maintained a stellar profit record, never making a loss over all those years while delivering dividends to shareholders on almost every year as a listed company. This report seeks to provide an objective consideration of the company and its performance.
Walmart financial health, trends and comparison with competitors
For more than 50 years, Walmart has been an attractive stock for value investors or conservative investors who prefer to buy stocks with a low share price relative to its income and book value. However, as per the 2020 quarterly reports, its financial ratios paint a changing picture for the corporation.
The company’s price to earnings ratio stands at 21.24, which means its stock trades in the market at almost 24 times its earnings on each share. This value is way above the general corporate standard of 15 for US companies, which means Walmart delivers a lower dividend on shares than other listed firms in the NYSE. This ratio has been rising over the last five years from an average of around 13 in 2014 to 21 in late 2020, suggesting shareholders have been getting lower dividends in recent times compared to previous years. This figure is, however, much lower than Costco Inc., its closest rival in terms of revenue, which has a P/E ratio of 39, which means it delivers an even lower dividend per share compared to Walmart. However, Target, which has a much smaller operation and earnings, delivers a P/E ratio of 20, almost like Walmart. The firm’s wildly fluctuating and rising P/E ratio suggests share price volatility, which is a dangerous sign for value investors who value stability and predictability.
On the price-to-book (P/B) ratio, Walmart continues to disappoint investors. This ratio compares the company’s market value and its real book value with value investors maintaining that a maximum of 3 is usually ideal. A P/B ratio below 1 suggests the company share is a bargain and anything above 3 suggests overvalued stock. By December 2020, Walmart had a P/B ratio of 4.8, which means investors are paying too much for the stock compared to its real book value. Short term investors would consider rising P/B ratios as signs to unload their shares because this accompanies rising share prices. On the other hand, Costco has a P/B ratio of 9.05 while Target has a P/B ratio of 6.48, meaning their shares are even more overvalued than Walmart.
The generally high P/B ratio among retailers and supermarkets listed in stock exchanges points to a wave of investments in the sector as a whole possibly triggered by the Covid-19 pandemic currently ravaging the world. Investors may be expecting increased reliance on retailers and supermarkets in general because fewer people are going out to eat in restaurants due to social distancing concerns. Consequently, there is increased investor interest in listed retailer stocks. Hence, Walmart may be the most reasonable stock for value investors looking to invest in the sector.
On Return on Equity (RoE), which indicates a listed company’s net income as a proportion of shareholder equity or shows how efficiently the management team is carrying out its mandate, Walmart has a value of 24%. Investors usually pursue RoEs above 10%, which is generally good. Anything above 25% is usually a sign of excellent performance and sound management in the organization. On the other hand, Costco has an RoE of 23%, while Target has an RoE of 31%. These RoE values suggest that retail managements perform exceptionally well in 2020, possibly due to increased earnings. They are not squandering in other parts of the business that would erode income, such as debt and cash acquisitions.
The Debt/Equity (D/E) Ratio is also a good indicator of a company’s financial health because it shows whether a company is managing its debts well or not. It shows the percentage of a company’s debts compared to its earnings. Financial analysts suggest the ideal scenario is when the debts are lower than the earnings, i.e., less than 100%. As of October 2020, Walmart has a D/E ratio of 52%, while Costco and Target have 40% and 94%, respectively. This rate suggests managing its debts well, ensuring they are way below the danger zones while delivering value to the shareholders.
Finally, on financial health, the company’s current ratio compared to competitors would be of interest. This ratio expresses the company’s ability to pay off its current debts due within 12 months, i.e., its short term liquidity. This ratio compares the company’s current assets, which can easily convert to cash within a year against its current liabilities. A value of 1 or more is often desirable for investors, with value investors aiming at 1.5 or more. Walmart has a current ratio of 0.84, while Costco and Target have ratios of 1.13 and 1.05, respectively. These values mean the latter two companies have much better short-term liquidity than Walmart, which is a sign of how heavy its debt burden has probably become.
In summary, Walmart still provides a stable long term investment for conservative or value investors compared to rivals within the retail industry, such as Costco and Target. It matters, such as in P/E ratios and D/E ratio, the firm is well above its rivals. It could be the baseline considering its revenues and earnings, which are the highest in the industry and globally.
Sector Analysis of retail
Strengths
The retail industry has various strengths that have ensured most sectors operate with decent earning and profits. Key among those is the supply and pay model, which ensures producers buy space in their premises and wait until they sell off products before paying them. This model ensures that retailers’ capital is not tied up in buying stock from producers, allowing them to dedicate resources to other expenses such as space, labor, utilities, marketing, etc. This model also enables retailers to set prices for customers and the producers, which accords them disproportionate strength in the entire supply chain.
Retailers also have the advantage of being cash based on the front end and credit-based in the back such that customers will always buy products and pay immediately. In contrast, suppliers/ producers have a waiting period before receiving returns. This model enables retailers to operate with minimal financial pressures because they can set convenient waiting periods to address internal pressures before responding to their suppliers.
Weaknesses
Retailers generally have poor labor relations and sub-par human resource practices than other industries due to the pressures of adapting to customer needs. Some of the causes include the fact that customers show up in large numbers after work hours, on holidays, on weekends, etc., which means high pressure on staff. This weakness ensures big retailers like Walmart are at constant risk of lawsuits that chip away large portions of their earnings in court and out of court settlements. Lawsuits are, therefore, a constant threat for all major players in the sector.
Due to the industry’s attractive model mentioned above, the sector experiences intense competition based on pricing and attracting the best talent. Therefore, staff attrition rates are high, and margins are always under pressure as competitors lower their prices to attract customers. Consequently, retailers feel the need to expand with new branches to maintain profit margins continually.
Opportunities
Retailers are facing great new opportunities to open online stores as customers shift their activities to the internet. This shift online is genuine for the millennial generation that has made online retailers some of the biggest businesses globally, e.g., eBay, Amazon, Alibaba, etc. Online retailers have a significant advantage over retailers who maintain physical stores because there are many overheads they do not have to pay, e.g., rents and leases, salaries for floor staff, utilities, promotional and marketing stand for the stores, etc. As a result, online stores tend to have lower expenses and higher profit margins than physical store retailers.
Threats
Retailers who maintain physical stores face the threat of the Covid-19 pandemic, which prevents customers from visiting crowded places due to social distancing concerns. The disease’s viral nature means that minimal contact between people is enough to cause a local and even regional epidemic. Therefore, lockdowns and cessations of the movement have hit many retailers as hard as customers stay away from their physical stores to avoid contracting the disease.
Factors affecting the industry
Technical innovation
The growth of e-commerce is transforming the retail trade as more and more customers shift their shopping to online platforms that can offer them products at low prices due to reduced overheads. Retailers with a strong physical presence across multiple regions and countries find these stores increasingly redundant as their online sales experience growth and their offline stores witness stagnation. The logistical challenge of running one robust website compared to the effort involved in running thousands of stores is incomparable. Therefore, retailers face external pressures such as increased competition from rivals who are exclusively online serving clients who would have visited stores and internal pressures as physical store incomes decline.
Secondly, the disruption of the global economy by the Covid-19 pandemic, which has disrupted business everywhere and taken a toll on health systems, is bound to have a lasting effect on the retail industry for two reasons. First, retailers, even those exclusively online, operate outlets, and warehouses that require many workers in the same place at the same time in conditions ripe for the spread of the virus. Such a scenario presents various threats. Workers infected due to working conditions can become a massive legal liability for the company if the infection happens within the workplace. Furthermore, governments have instituted lockdowns worldwide to limit the virus’s impact, leading to reduced business both in physical stores and warehouses. The impact of this is indefinite because it remains unknown when the virus abates and allow economies to resume full operation.
Assessing Walmart’s position in retail
Walmart is the undisputed global retail leader with 11,510 stores spread across 27 countries in almost all continents, operating under 56 different brand names in diverse territories. This conspicuousness has accorded the company immense brand equity, instantly recognizing its offerings and business model with customers worldwide. Walmart is even acquiring successful supermarkets overseas and rebranding them or retaining their brand names when convenient. Hence, Walmart locations across the globe may not be readily apparent unless it reveals its presence behind an existing supermarket brand.
In 2019 the company hit a milestone when its revenue rose to $524 billion, slightly more than its net worth of $514 billion, while it delivered a net income of $6.7 billion. Therefore, it is the single most prominent company by revenue globally with the leverage to buy out or even kill rivals wherever it travels overseas. Walmart has experienced consistent growth since its inception in 1962, drawing in earnings without fail from the first year of operations until its most recent quarter. The company is estimated to welcome more than 37 million people to its stores daily, translating to more than 10 billion clients who spend less than $50 on average per visit. These statistics have made the company an undisputed market leader both at home and abroad, wiping out many a weaker competitor.
However, the company may have finally met its match in newer online-based competitors such as Amazon and Alibaba. They embraced e-commerce earlier on and have built brand equity with clients that Walmart cannot rival. Despite having lower revenue streams, Amazon with $296.3 billion in turnover and $10.6 billion in profits, higher than Walmart. Alibaba, on the other hand, had revenues of only $70.6 billion and profits of $24.7 billion, four times what Walmart did in the same year (2019)
Walmart grew such significant overtime because of its low price policy, which ensured middle and low-income earners flocked to its stores. This strategy is part of why the company could penetrate some of the remotest parts of the developed world easily and quickly. However, online and offline competitors have started subjecting the company to extreme pricing pressure, eating into its clientele and eroding its customer base. It is not yet clear how the company will react to these assaults, but its response could be a lifesaver or a death blow from which it will never recover.
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