I've been asked a number of times to analyze Wal-Mart. My goal here is not to offer stock tips; rather, I want you to be able to do it yourself. Still, I looked at (and bought) Wal-Mart for myself, so here it is:

To preface, investors that comb Morningstar to get owner earnings will have noticed that Wal-Mart's haven't grown much. But with rapidly growing companies that are real estate heavy (a la Wal-Mart), you need to separate the growth spending from the business value numbers.

According To Morningstar

Morningstar reports Wal-Mart's free cash flow as rapidly fluctuating from 1998-2007, ultimately ending up right where it started at $4.5 Billion. At a quick glance, it would appear that there is no consistency in Wal-Mart; but, while we like "easy", we also like "money" and Wal-Mart deserves a little more investigation.

Capital Expenditures

Wal-Mart's capital expenditures (CapEx) have grown rapidly over the past ten years. Then again, so has the number of stores—from 3,373 in 1998 to 6,779 at the end of fiscal year 2007. The question is: How much does Wal-Mart have to spend to keeps its doors open vs. how much it is spending on growth? For this, we dig into Wal-Mart's annual reports.

From 1998-2007, Wal-Mart spent approximately $2 Mil per existing store in CapEx. How did we get that? Simple: Number of stores open divided by CapEx for the year. Then, we take a median value because we can't focus on a single year's spending or performance.

Wal-Mart also spends roughly $4 Mil to open a new store. To calculate this, we take the change in the number of stores and divide it by the change in CapEx...then take the median value again.

If we backtest that calculation vs. the number of stores open and opened, we see that Wal-Mart (1999-2007) had $110.5 Bil of CapEx according to our calculation and reported $112.6 Bil. Considering that we are rounding all of our numbers and dealing in millions, I'm happy with just a 2% difference and am confident in these numbers.

Now we know roughly how much Wal-Mart's stores are costing to remain open. Let's move on to the cash that they generate:

Cash From Operations

The net cash from operations that Wal-Mart reported from 1998 to 2007 grew steadily—and that is the basis for our owner earnings. In fact, using 5- and 7-year timeframes, Wal-Mart's cash from operations grew at a median rate of 16.9%.

Considering that Wal-Mart's CapEx are pretty much fixed based on the number of stores they have, we can say that Wal-Mart's owner earnings are equal to Cash Flow From Operations minus the cost of keeping existing stores open. Take a look:

in $Mil 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Cash From
Operations 7,123 7,580 8,194 9,604 10,260 12,532 15,996 15,996 17,633 20,164

Capital
Expenditures 6,788 7,029 7,816 8,196 8,641 9,182 9,657 10,428 12,148 13,642

Owner
Earnings 335 551 378 1,408 1,619 3,350 6,339 4,616 5,485 6,522

Wal-Mart's owner earnings have been growing wildly at more than 47% a year—for ten years! Now, we can't expect that to go on forever. Let's get a little more conservative. What if Wal-Mart's owner earnings grew half as quickly over the next ten years as they did over the last ten years?

Assuming owner earnings grew at 23.9%, and discounting back at 15% (our desired return), Wal-Mart's present value of cash flow is $176,343 Mil. Add in the $61,573 Mil of Shareholder Equity, and we get an intrinsic value for Wal-Mart of $237,916 Mil, or $57.90 a share. With a 25% discount on this giant industry leader, we get a target purchase price of $43.43.

What If We Use A Lower Discount Rate

Let's look at Wal-Mart if we were to use a 9% discount rate. The future cash would be worth $314,844 and we would get an intrinsic value of $91.61 per share. With a 50% MOS, Wal-Mart would look attractive at $45.81 per share.

Either Way You Slice It...

Wal-Mart, underpriced to its value and trading right around where Buffett bought it two years ago, looks pretty darn attractive. The bad news we got yesterday? It's all part of the business cycle. Let the analysts focus on short-term results; we buy businesses for the long-term.

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Comment on this [ 51 ]	By: Joe Ponzio

comments

Joe, watch your base year. F2007 CFO included $849mn from discontinued ops, which you should probably pull out.

by BP on August 16, 2007 at 10:45 AM

One other thing....by using a median rate of CFO growth of 16.9%, but normalizing Capex to just the maintenance portion (which is prudent), essentially you are giving WMT credit for the portion of their growth that came from new stores, but hitting them for the cost of those stores. I agree that valuation is an inexact art (and not even close to a science), but it seems to me basing future growth on past growth that INCLUDES benefit from new stores, but basing future FCF that EXCLUDES growth Capex is inconsistent.

I'm interested in your thoughts....

Thanks

by BP on August 16, 2007 at 5:18 PM

Hi BP:

As for the discontinued operations, that was accounted for in the cash flow. Though Wal-Mart claimed an $894 million loss from discontinued operations, that was a claim to the IRS and did not affect cash. It was added back in to the statement of cash flows as the company reconciled net income (and losses) to actual cash charges.

The actual cash expenditure was the "Net cash used in operating activities of discontinued operations" which was only $45 million (relative to $6.5 billion).

In regards to the second comment, when Wal-Mart generates cash, they can pay it to me or plow it back into the business in the form of new stores. To make it simple:
Let's assume a company generates $10 from a single store and that it can open a store for $2. As the owner, I get $10 a year from it. Now, let's assume it uses that $10 to open five ($10/$2 = 5) more stores - did I earn any less? No - my company plowed the $10 back into itself to grow. It didn't have to open new stores, it did so for growth.

If my company didn't open the new stores, it could have paid me the $10 and I could have reasonably expected $10 again next year. Instead, it kept the $10, reinvested for me, and now I can expect $60 next year.

In this scenario, my company generated $10 for me. Rather than letting me reinvest it elsewhere, it chose to keep it and reinvest it for me. Is that $10 gone? No - it went to the balance sheet in some form of assets and it is being used to generate more cash.

Going back to Wal-Mart: I expect the company to keep opening new stores. When it does, I have a reasonable basis for knowing what to expect from each store. Still, the CapEx associated with opening stores generally goes to the balance sheet (in the form of shelves, buildings, etc) and I become part owner in the new store. In that case, the future CapEx for growth is not a charge to or reduction of owner earnings, it is a reinvestment of owner earnings.

Let me know if that makes sense or not. I kind of got long winded.

by Joe Ponzio on August 17, 2007 at 9:59 AM

Hi Joe,

Another great post

A few questions

a) while your cash flow from operations no's tally with morning star (except for 2005 where you have assumed 2004 and 2005 to be identical), the cap ex no's don't tally with either morning star or msn money and there are big differences; in fact there are big differences between msn money and morning star for cap ex in the years of 2003, 2005 and 2006; the differnces in FCF have a big impact and I am unable to reconcile them
b) if I use the FCF no's in your table, I get a median rate of 47% as against 16.9%
c) even if we presume 16.9% is the median rate and extrapolate it for the next 10 years and then at 5% for the next 10 and discount it at 15%, I get a total value of $ 181 bn (including current networth); this when divided by 4.11 bn shares outsanding gives a value of $ 44 per share which is what WalMart is quoting right now
d) if you look at the CROIC (another important ratio that you had talked about), the median over multiple time frames is 5.4%-does not seem to be a very effective use of debt-your thoughts?

Regards

Sridhar

by sridhar on August 17, 2007 at 11:21 AM

Thanks Sridhar. I fixed it.

by Joe Ponzio on August 17, 2007 at 2:16 PM

Hi,

I was a little confused in your calculations for Wal-Mart's capex cost for a new store and capex cost for existing stores. It just seems to me in your first calculation that by taking the number of stores open by the Capex for the year, that Capex also includes the cost of opening new stores in it so you would not be isolating the maintenance capex portion. For the second calculation, when you took the change in the number of stores and divided it by the change in Capex, it seems that that change also includes in it the increase in maintenance Capex from the stores that were opened in the initial year you started from since the maintenance Capex for those new stores wouldn't have been recognized until the following year, which would then be included as part of the change in Capex.

I'm not sure how clear that was so i'm just going to include this example:
---Company X opens new stores at a cost of $10 and has "maintenance" costs of $2/yr for existing stores. So the Capex will be the following:

Y1: $10 (opens 1 new store)
Y2: $22 (opens 2 new stores + 1 stores maintenance)
Y3: $36 (opens 3 new stores + 3 stores maintenance)
Y4: $50 (opens 4 new stores + 4 stores maintenance)
Y5: $70 (opens 5 new stores + 10 stores maintenance)

1.) According to your first calculation (using Y3): $36 Capex/6 stores = $6 for each existing store {Number should have been $2}
2.) According to your second calculation (Y2 to Y5): ($70-$22)/(15-3) = $4 for each new store {Number should have been $10}

---I could have easily have completely misunderstood what you were doing but any clarification would be a huge help!!

Thanks and keep up the good work,
Mike

by Mike on August 17, 2007 at 10:50 PM

Hi Mike,

The problem with your example is that it is so small scale that the numbers can't normalize. That is, the addition of a single store adds such a huge portion to your CapEx that it skews your numbers.

But, stretch it out into Wal-Mart scale (from hundreds to thousands of stores) and you'll begin to see the CapEx normalize. And, as I mentioned, I rounded down - that helps get rid of some additional growth CapEx. Using your numbers:

Year 35: $1,540 (opens 35 stores + 595 old stores)
Year 36: $1,620 (opens 36 stores + 630 old stores)
...etc

Now, if we take the Year 35 Cap Ex minus the Year 35 stores, we get about $2.44 per store. Round down to help normalize the numbers, and we get $2 per store. Now, the change in CapEx:

We know we had 630 old stores in Year 36 at $2 per piece: $1,260.
Total Year 36 CapEx was $1,620.
Change in Year 36 CapEx: $1,620 - $1,260: $360.
New stores added in Year 36: 36
CapEx per new store: $360/36 = $10

Why does this work? The law of large numbers. In your small business example, the growth CapEx were such a huge portion of the total CapEx that we could not see the smooth trend as CapEx and store growth normalized.

Do we know if Wal-Mart's maintenance CapEx is precisely $2.0 Mil? No - but I am confident that it is right around there for all the stores (some higher, some lower).

It goes back to the root of investing: Look for simple, consistent businesses. If you put your example into a spreadsheet, you would see that your CapEx grew (from Year 1 to Year 10):

200%
100%
67%
50%
40%
33%
29%
25%
22%

Once it normalized and changed less rapidly (3%-7%) in the later years, we could comfortably and confidently pick apart the numbers. Otherwise, could we really have predicted the future of the company when CapEx were growing widly? (I couldn't)

(Note: You don't have to wait for CapEx to slow to 3%; rather, we are looking for consistency.)

Hope that helps!

by Joe Ponzio on August 18, 2007 at 12:14 PM

Hi joe

just to confirm that the cash from operation - Capex = owner's earning, which acutally is the Free Cash Flow?

also, why a drop in discount rate (desired rate of return) from 15% to 9% will see an increase in the MOS?

if we drop our desired rate of return but with also an increase in MOS, will still then give us roughly the same rate of return after all isn't it?

eg, rate of return drop by 40%, but compensated by an increase in MOS of 25%, as a result we will not get a return of 9% only right?

regards

by Tien on August 18, 2007 at 10:52 PM

Hi Tien,

Here is an explanation of Owner Earnings and one on discount rates.

Hope that helps!

by Joe Ponzio on August 20, 2007 at 9:49 AM

Joe,

superb superb analysis and I am already hooked to your site. My question is why we have to add shareholder equity ( $61B ) to the PV of FCF's to get intrinsic value.

The shareholder equity = net assets that the business needs to conduct its operations right? so why include that in your calc? cash and debt yes, but shareholder equity?

thanks for such a great site and intelectually stimulating experience. Jay

by jay S on August 20, 2007 at 12:32 PM

Hi Jay,

When I buy a stock, I look to value the entire business. Part of that is valuing the assets—the cash that we would receive if the company closed down, sold everything, paid back debt, and split up the cash amongst shareholders.

Another visitor had the same question here. I responded here.

Hope that helps!

by Joe Ponzio on August 20, 2007 at 2:55 PM

Joe:

Nice job in explaining how to discount future cash flows -- coming from someone who spent $4,000 on an MBA course in Finance learning the same lesson that you explained in several sentences!

Best,
David J Phillips, Publisher
10Q Detective

by David J Phillips on August 20, 2007 at 4:28 PM

Thanks David!

by Joe Ponzio on August 23, 2007 at 12:21 AM

I'm having trouble finding the Capital Expenditure numbers that you list in your table. When I look on Morningstar, I see this:

1998 - (2,636.0)
1999 - (3,734.0)
2000 - (6,183.0)
2001 - (8,042.0)
2002 - (8,383.0)
2003 - (9,355.0)
2004 - (10,308.0)
2005 - (23,880.0)
2006 - (27,028.0)
2007 - (15,666.0)

If, rather than Capex, you've just listed the cost of maintaining existing stores based on your analysis, I can get numbers that are closer. Well, at least for 1998 and 2007 since you list those. Where do you get the number of stores open in any given year?

Cheers,

by quick on August 23, 2007 at 3:52 PM

Hi quick,

Wal-Mart is an example of a more difficult business to analyze. To get the number of stores, I had to go straight to the company's annual reports filed with the SEC. In those reports, they list the total number of stores open. From there, it was just some simple math to see the net change in stores from year to year.

This eleven year summary filed with the SEC shows all of Wal-Mart's stores. Look at the "Other Year-End Data" on the first table.

by Joe Ponzio on August 23, 2007 at 4:08 PM

Great, thanks for the link.

Would you think a similar methodology would work for other large discount retailers, such as TGT? Their cash flow statement shows similar ups and downs in free cash flow, although operational cash flow growth has been fairly good.

Cheers,

by quick on August 24, 2007 at 8:24 AM

A look at Google Finance shows vastly different numbers for CapEx in fiscal 06` and 07`.

Example:
Morningstar Capex 2006: $27028
Google Capex 2006: 14530

That's a difference of about 12.5 billion!! Any idea who has the right info? That's a huge discrepancy. Is there an easy explanation?

by Nick on August 26, 2007 at 1:35 PM

Nick,

I would think the WMT annual reports would be the best source for these numbers. You can find them all here.

Then go to the cash flow statements and look for payments for property and equipment. Doing that I get numbers close to the ones in Joe's table, although not exactly the same, but close enough.

From looking at annual reports from different years I have seen that WMT isn't quite sure how many stores they have, lol. But the descrepancy typically is only a few stores.

Morningstar's numbers for 2005 and 2006 for Cap Ex appear to be way off.

by MikeR on August 26, 2007 at 4:07 PM

Thanks MikeR,

Your best bet is to go straight to the source - the annual reports (10-k) filed with the SEC. My numbers differe slightly because I tried to separate the growth CapEx from the maintenance CapEx and then show the owner earnings without the growth CapEx.

by Joe Ponzio on August 26, 2007 at 5:41 PM

Thanks Mike and Joe...it definitely makes sense to go to the source...it's too bad, b/c I just love the convenience of Google. Oh well.

by Nick on August 26, 2007 at 9:09 PM

Great site!

Can you PLEASE address the downside on WMT from these prices?

Moreover, can you address a worst case free cash flow growth estimate going forward?

23% FCF growth, even if it has been cut in 1/2 just seems too fast.

THANKS!

RJ

by RJ Meurer on September 27, 2007 at 7:45 PM

hi Joe,

Could you share the Excel for Walmart where you've worked out all of the above.
Thanks a ton :-) and great explanation.

The same set of calculations or things to consider would apply in other companies as well right? such as WFMI, WAG etc. where these companies are opening a number of stores continuously which are adding further value.

by Sanjay Shetty on September 29, 2007 at 4:53 AM

Would we follow the same methodology (as you demonstrated for retail) for hotel properties? HOT or MAR?

by Babui on October 5, 2007 at 8:08 AM

Joe,
Quick question on how did you come up with the numbers for CapEx, I'm a paid subscriber for Morningstar and the numbers on CapEx for WMT are much different than the numbers you have, thanks.

by Carl on October 6, 2007 at 2:57 PM

Carl,

Joe is typically away from the blog on weekends, so I thought I'd chime in to help you out. It is best to get your information straight from the companies financial statements from their 10k reports. You can access those at the Edgar database at www.sec.gov. I could never figure out why Morningstar could be off by $18 billion on their capex figures, but they are. It makes me a skeptic any time I look at financial statements from their site, so I typically keep a seperate window open with the company's actual annual report in order to check all the numbers. It takes a bit more attention, but you're better off being sure. Also, as far as I've seen, MSFT's capex numbers have been Morningstar's only real error, but then again, maybe they know something that we don't.

by Nick on October 6, 2007 at 4:22 PM

Nick's right (thanks Nick!) - the EDGAR database/company reports are the best place to get info, and I am usually away from the blog on the weekends. Still, I figured I would chime in as well.

Reread the comments on this post for more detail - I explain it there. If you still don't see it, post another comment and we'll drill down the problem and figure it out.

by Joe Ponzio on October 6, 2007 at 10:30 PM

RJ: Sorry, I completely left you hanging after our conversation. I promise I will get that info to you this coming week. (I am truly sorry!)

Sanjay: I'll have to recreate it. I don't know where the heck I saved it on which computer, and I am sure it is lost. Give me a few days (at the least).

Babui: You can use the same valuation methodology on any business in any industry.

by Joe Ponzio on October 6, 2007 at 11:10 PM

Joe/Nick,
Thanks for the responses. It looks like Morningstar is using the number on "Payments for properties & equipments" on WMT's 10-K as CapEx. Using 2007 as example, can you explain how you come up 13642 as the CapEx ? Thanks

by Carl on October 7, 2007 at 12:40 AM

Carl,

Wal-Mart appears to spend roughly $2 million a year to maintain its existing stores. At the end of fiscal year 2007, Wal-Mart had roughly 6,800 stores open around the world. Multiply the two and you have roughly 13,600. The slight differences in the math are calculated behind the scenes in the spreadsheet. (But don't fret over being too precise)

Hope that helps!

by Joe Ponzio on October 8, 2007 at 9:28 PM

A rather negativ view in the valuation would be the following status quo scenario.

Let's assume WMT doesn't open new stores anymore and just keeps staying permanantly in business in the current size.
you could extract 6,5 billion dollars each year which is (with a given market cap. of about 185 billion) a very poor interest of abot 3,5 % per year which is lower than any usual interest.
Additionaly you couldn't argue that it is after inflation, as you did not consider (as far as I could realize) that the cap expenditure per existing store will go up over the years because of inflation.

Is there any omission in this no-growth scenario?

by Manfred on October 12, 2007 at 7:33 AM

I think WMT is one of the biggest no brainers there is. Buffett being on board simply re-affirms this.

by Karl on October 12, 2007 at 5:14 PM

Joe, great site.

Going over your calculations for cash required to keep their stores open, I see where you get the 2 million figure. However I noticed that the figures were consistently less in the 1990's than in the 2004 and later years. Since it would be logical that their costs are higher now, with inflation, etc, wouldn't it be better to use a figure of, say, 1.6 million the first 3-4 years of the analysis, 2 million for the middle years, and 2.3 or so for the later years?

Doing this would remove the "value" of walmart as a current investment, making its current price actually higher than the intrinsic value.

Is there anything wrong with my reasoning?

Thanks, Alan

by Alan on October 12, 2007 at 9:35 PM

Alan:

That was exactly my concern with the second remark.

Joe:

Wonderful tutorial indeed. Probably one of the best of all available.
But in theory it is still more easy than in reality. Finding the relevant parameters for the success of a businness itself is a lot more tricky and differs from the art of business very widely.

I am still interested in your opinion on a no-growth scenario in WMT. I think you are a little bit to much on the optimistic side in your assumptions.
I think WMT ist attractive, but one should not realistically expect a return on your buying price of 15 % annually for the next 10 to 20 years under current inflation figures.

And - please excuse my Englisch (not my mother tongue).

Please keep going your extraordinary goog work.

Manfred

by Manfred on October 13, 2007 at 3:35 AM

Alan & Manfred,

I believe that a large part of Wal-Mart's large CapEx in recent years was the complete redesign and reconfiguration of its distribution plants/arrangements and part was the huge inflation/overly optimistic real estate bull market - two events that are unlikely to occur in the next ten or so years. As such, I tried to account for that by averaging CapEx over longer timeframes.

But remember that you have to be 100% comfortable and confident in your assessment as well. If you don't like Wal-Mart for whatever reason, skip it. There are easier companies to value.

I don't see the point in running a "no growth" scenario above what I wrote here simply because I don't see that as a reality. If you are concerned that Wal-Mart has zero growth left, then you should definitely not buy at these prices and you can move on to the next company.

Hope that helps!

by Joe Ponzio on October 13, 2007 at 5:19 PM

Thanks Joe, that makes sense, and I hadn't thought of it.

Alan

by Alan on October 13, 2007 at 9:56 PM

High Joe,

thanks for your answer. A good point considering higher land prices as usual for the last couple of years.
Anyway - the no-growth scenario was just an academic point of view and is still better than the asumption of a declining business.
But I do consider WMT at actual prices as one of the best values for the money in large US caps. So I do not disagree but have a general more sceptical point of view.

Manfred

by Manfred on October 14, 2007 at 11:27 AM

Hmm. Not sure if I am getting this. I took the JNJ excel sheet and tried it out with WMT. I looked at the 10-k to find the shares and as of March 16, 2007, there were 4,124,451,341 shares outstanding. When I change the shares to this number, I get a value of $24.38 a share. What am I doing wrong, where is the best place to get shares outstanding info, and can I use the excel sheet for any company by just changing the share data?

Thanks!

by Dom on October 19, 2007 at 4:42 PM

Dom,

Look at Joe's response to Rick on October 12th.
I hope that helps.

http://www.fwallstreet.com/blog/4.htm#133

by Ron on October 19, 2007 at 5:50 PM

Still don't get it. I am using the Morningstar website and I entered in the 10 year balance sheet and cash flow items. I still come out with a value of around $20 per share. From the latest 10-Q, I found " Indicate the number of shares outstanding of each of the issuerâ��s classes of common stock, as of the latest practical date.

Common Stock, $.10 Par Value â�� 4,068,226,506 shares as of August 24, 2007."

I also come out with a total value of Walmart as $100,556 which doesn't look right

by Dom on October 19, 2007 at 11:28 PM

Dom-

Reread the post. Joe didn't just use the morningstar numbers - he made some adjsutments to separate growth and maintenance cap ex. Try to use the assumptions in the post.

Check your numbers too. Morningstar has everything listed in millions. Your $100,556 is probably in millions, meaning Wal-Mart is worth $100.556 billion.

by Jason Z. on October 20, 2007 at 10:41 AM

Hi Joe:

I've been wondering about this question for a while, but I wanted to post it to get your thoughts after looking at BNI.

It seems that this adding back of expansion capex is something that should be done for every business that we evaluate, as in theory, every business is trying to expand. So, for WMT that is additional stores, and for BNI that is additional tracks, engines, etc. to expand the business. Further, it seems we should add back in cash used for dividends and share repurchases, as this is cash the business generates that is available, and does, go to the owners.

So my question is when do we decide to undertake this additional evaluation? This is an exercise that clearly has a large effect on our valuation, but may not be immediately noticeable.

For what it's worth, after this work I get a target price for BNI of $85 with a 25% margin of safety. (although anyone should feel free to poke holes or chime in...)

Thanks again for the great blog, this site really is fantastic at breaking things down in a simple and easy way, and we all appreciate the time you put in!

Tom

by Tom on November 7, 2007 at 7:27 PM

Hi Joe,

I was trying to do a similar analysis with Target (find out the cap ex for existing stores, and use that for the cap ex), but then I realized that I was still using the same free cash flow. The problem is that this cash flow includes new store revenue. Just because a store is new, doesn't mean it hasn't contributed any revenue to the total numbers.

So wouldn't you have to back out the new store revenue as well, since you are backing out the new store cap ex?

I only thought of this because I was reading the annual report and they stated that the "Total revenue growth was attributable to the opening of new stores, a comparable-store sales increase of 4.8 percent, the addition of the 53rd week and the 19.5 percent increase in net credit card revenues. "

This would lead me to believe that new store revenue is not neglible, and should be subtracted from the free cash flows.

by Allen on November 11, 2007 at 10:31 PM

Sorry, after reading the earlier comments, I realize that my comment was redundant.

by Allen on November 13, 2007 at 11:34 AM

I am trying to understand this in Starbuck's terms..

For 2007 they had 15011 stores total, including the 2571 news ones for the year.
Their Capital Expenditures were 1,080mil.
So does it go for maintenance: 1080 / 15011 = .07? Does that means costs were 700,000 per store? Their median for these numbers for the past 5 years is .06, so 600,000 per store?

And for new stores.. 2007 CapEx = 1080, 2006 CapEx = 771.
1080 - 771 = 309
New stores in 2007 = 2571

New store costs: 309 / 2571 = .120, or 1.2m per store?

Am I doing this right? And what is the next step, I don't understand what is meant by backtest the numbers; is it add up all of the CapEx on the datasheet for the past 5 years(in my case) and compare that to..

For each year: (Stores Existing * .06) (New Stores * .12) =
Then add up the numbers? Because when I do this with my figures for 2003-2007:
577 675 814 1009 1208 = 4283 Versus the 3238 if you just add up the CapEx figures.

If I stop double counting new stores as needing maintenence..
(Stores Existing - New Stores) * .06 (New Stores * .12)
505 594 712 877 1054=3742, which is closer to 3238 atleast.

Sorry for being so new/oblivious!

by Night on December 7, 2007 at 1:11 PM

Hey Night,

I haven't looked at SBUX for a while. Let me do some leg work this week and I'll post my analysis.

by Joe Ponzio on December 10, 2007 at 10:39 PM

It is finals week so I haven't had a chance to study it more to see if I can't figure out how this works in SBUX's case. I'm looking forward to your analysis!

Thanks:)

by Night on December 11, 2007 at 12:34 AM

Joe:

dumb, low-level question - is there any logic behind using the median rather than the mean for figuring average capex? i was busy staring at this cute girl during my statistics class...

by david on January 26, 2008 at 9:26 PM

David,

The mean or average can be greatly influence by very high or low outliers. Whereas the median is not as influenced by an outlier. For an imperfect, but cool visual representation click here.

by Nick on January 29, 2008 at 5:07 PM

Great visual Nick!

by Joe Ponzio on January 31, 2008 at 9:34 AM

hello joe,
you said in this post:"Assuming owner earnings grew at 23.9%, and discounting back at 15% (our desired return), Wal-Mart's present value of cash flow is $176,343 Mil"

when i take the 6,522 of free cash flow(=owner earnings) and do a simple Future Value of it in a compunded rate of 23.9% for 10 years i get 55,602.4. discounting it at 15% doesn't get me 176,343 like you wrote.

how did you get to that number? what is the calculation?

by David on May 9, 2008 at 5:23 AM

David: You can't do just one future value and then present value. You have to figure out the present value for each year's cash flow.

In your math, you asked: What is the future value of $6,522 growing at 23.9%? (Answer: $55,602) Then, you asked: What is that worth today if I want 15%? (Answer: $13,744).

What you need to ask is:

How much cash will the business generate next year? Then, what is the present value of that cash?
How much will it generate in two years? What is the present value of that cash?
How much will it generate in three years? What is the present value of that cash?
And so on.

In your math, you figured out the value of the tenth year's cash flow, but you didn't get the value of the cash flow for years one through nine.

Make sense?

by Joe Ponzio on May 14, 2008 at 10:55 AM

Looking At Wal-Mart