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Discount, Variety Stores

Discount, Variety Stores. Module 3: Market Multiple Valuation Claire Lin. Performance Measurements Selection. From Balance Sheet: NEA Compared with Equity Value/Book Value, Enterprise Value/NEA multiple doesn’t incorporate impacts of capital structure

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Discount, Variety Stores

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  1. Discount, Variety Stores Module 3: Market Multiple Valuation ClaireLin

  2. Performance Measurements Selection • From Balance Sheet: NEA • Compared with Equity Value/Book Value, Enterprise Value/NEA multiple doesn’t incorporate impacts of capital structure • From Income Statement: EPAT from Sales • EPAT from sales is more closely related to operation than NI and CI as other revenues, interests and other comprehensive incomes are not considered • Industry-Based Multiple: Sales per Square Foot • Sales per square foot of selling space is a common measurement in the retail industry

  3. Comparable Companies • There is no perfectly comparable company • Costco is a membership warehouse club • Operation model is different with higher values and lower margins • Target focuses on merchandises with high quality • Dollar General doesn’t provide a large selection of merchandises

  4. General Information • The fiscal year end of Costco is different. The data of 09/01/2012 is applied as it is closer to the year end of the other three firms

  5. NEA Multiple Exclude Costco

  6. $74.42 NEA Multiple • Wal-Mart is undervalued when all three firms are considered ($87.04) • Lower NEA is required for Wal-Mart as working capital is generally negative with positive payment agreements with suppliers • Wal-Mart is overvalued when Costco is excluded ($62.61) • Costco’s account payable is more than six times than account receivable. Lower NEA is required with comparable sales

  7. EPAT from Sales Multiple Exclude Costco

  8. EPAT from Sales Multiple $74.42 • Wal-Mart is undervalued ( $91.18 and $80.19) • This multiple does not consider the impacts of capital culture • The financial risk of Wal-Mart is higher with a relatively higher percentage of debt financing

  9. Sales per Square Foot MultipleS • This multiple doesn’t take size into consideration • The total square feet of selling space of Wal-Mart is significantly higher

  10. Sales Multiple • Wal-Mart is undervalued • The margin of Wal-Mart is lower than Target and Dollar General

  11. Recommendation • With a current market price of $74.42, Wal-Mart is undervalued • Recommendation: Hold • The spread between current market price and valuation is narrow

  12. Arguments

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