ye10112021 [A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stock (NYSE:WMT) | Seeking Alpha tfolio St Crash Course In Value Investing From olumbia: Why Wal-Mart Is An Attractive ‘ock 04, 2015 6:53 AM ET | Walmart Inc. (WMT) | 19 Comments | 2 Likes ’ Smart Owl Research [ratow 7 816 Followers mmary 1 previous articles, | calculated expected long-run returns of companies like lestlé, Unilever and Coca-Cola with the help of a special formula from Bruce 3reenwald. 1 this article, | will look at the formula which | learned in a Columbia Business ichool course in more detail. Three more traditional valuation methods are also iscussed. ‘0 make things more practical, | used Wal-Mart as an example, which was a case tudy in the course. 1a world where just about every financial asset is overpriced, | believe the shares f Wal-Mart are reasonably attractive. he formula predicts it is reasonable to expect a long-run return that is proximately 10%. is good enough for Warren Buffett, it is good enough for me" was my thought 2n enrolled in the Value Investing course at Columbia Business School last year. revious articles - see, for instance, on Unilever (UN, UL), Nestlé CPK:NSRGY), Coca-Cola (NYSE:KO) and Heineken (OTCQX:HEINY) - | argued it makes sense in the current climate to invest in companies that have franchise 1e and their (growing!) earnings protected by a huge moat. | substantiated this m with the help of a formula to calculate expected returns from legendary Value ‘essor, Bruce Greenwald. | learned this - in my opinion, brilliant - formula when | hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 5ye10112021 [A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stock (NYSE:WMT) | Seeking Alpha nded the course in Value Investing at Columbia Business School from professor o Santos, a colleague of Bruce Greenwald. ough there are various lectures from Greenwald on YouTube where the (intuition ind of the formula) is explained, it seems the business school wants to keep the aula a bit of an insider secret, not least for commercial reasons (due to the hefty on fee, a vacation is not an option this year...). 3 article will summarize the things | learned in the Value course. | will start with the itional Value approaches - the net-nets, asset value calculation and earnings ser value - to assess the attractiveness of share investments, and end with the chise value formula. -Mart (NYSE:WIMT), which was used as an investment case in the course, is das an example in order to make things more practical. jraham's Net-Nets ay view, most of the stuff that is lectured in the course can be seen as a tribute to legendary investor Benjamin Graham, who (not coincidentally) developed the rse in the early twenties with David Dodd (see this interesting video). ‘ takeaway from Graham: Look at the balance sheet of companies, valuation ters, and never pay for growth. Graham was famous for his bullet-proof net-net hod to find shares. The economist was interested in companies with a market 1e that was lower than its short-term assets (cash, inventory and accounts sivable) minus all liabilities. Speaking about "a margin of safety": in the ortunate scenario that a company had to file for bankruptcy, most of the time there 3 enough cash in the company to cover his investment. re heyday of Graham, the '30s and '40s - with low valuations and inefficient ‘kets - this method resulted in fabulous returns. However, in 2015, there are very companies trading below the value of working capital, To quote professor Santos: ‘ou are looking for net-nets you have to be in Japan. The thing is these companies e been net-nets for a very long time”. In other words: the retums today are less sfactory. hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 2128ye10112021 [A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stock (NYSE:WMT) | Seeking Alpha \BV: Asset-Based Valuation second method is less extreme, but it also solely looks at the balance sheet. This hod (chapter 4) - and the next (EPV method, chapter 5) - are brilliantly described sreenwald's excellent book Value Investing: From Graham to Buffett and Beyond. nvestor that uses this method basically tries to answer the question of how much ould cost to reproduce all the asset of the firm. This is hard work, as every entry he balance sheet (both assets and liabilities) must be adjusted to get the ‘oduction value. For cash, receivables and inventories, this is relatively easy, but it arder and much more arbitrary to calculate how much you need to invest to copy property, plant and equipment (PPE) and goodwill that is parked on the balance et. Let alone how difficult it is to put a price tag on the assets that are not on the ance sheet, but that new entrant would have to (re)produce these assets as well rkforce, product portfolio, costumers franchises, etc). ve course, we discussed Wal-Mart as an investment case (all figures are based he annual report of 2014). So as not to bore you here, | take a few shortcuts. The ting point was the equity value of $76.3 billion, of which all the goodwill of $19.5 on is subtracted, as we want to calculate the value of all the intangibles (on the ance sheet and not) ourselves. tep two, we adjust the PPE that is found on the balance sheet. With a little bit of rt, one can estimate to which degree the market value of all the land and real ate of Wal-Mart differs from the book value. We assumed it was, given the ease in land prices over the last decades, reasonable to add $25 billion of market 1e to the land - we basically doubled the book value of $26.2 billion. Professor tos made no adjustments for the other PPE item of $115.4 billion (buildings, ipment, transportation and construction in progress) o three looks at the cash an entrepreneur would need to use to copy all the ngibles of Wal-Mart. In the first step, we add the sum of all investments that are ded to create the Wal-Mart brand. Professor Santos’ guesstimate: $60 billion out 2/3rd of Interbrands estimates, according to him). hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 312811012001 |AcCrash Course In Value Investing From Columbia: Why Wal-Mart fs An Atractve Slack (NYSE:WMT) | Seeking Asha ddition, we assumed an entrepreneur had to invest $4.2 billion in recruitment to y Wal-Mart's workforce of 2.1 employees (this represents a generous recruitment of $2000 per employee). ea look at the steps below: " much will it cost to reproduce the assets of Wal-Mart? uity Value $81.30 vod wil $(19.50) Assume goodwill is worth 0, We calculate the intangibles ourselves, uity (excl $61.80 odwil) just PPE $25.00 Add $25 bin for increased value of land, angibles 1 $4.20 Copy workforce. Recruitment costs $4.2 billion. angibles 2 $60.00 The value of the brand. set value of equity $151.00 urce: Annual Report. Figures in billion dollars. sgether we calculated a reproduction cost of assets of $151 billion (note that this is / the equity component). An investor should compare this figure with the market italization of Wal-Mart to see if the stock is attractive. Given the market italization of about $240 billion, one cannot say Wal-Mart is cheap based on ible asset valuation. zan be seen in the next chapter, this does not mean the shares of the company unattractive. ‘arnings Power Value hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 412811012001 |AcCrash Course In Value Investing From Columbia: Why Wal-Mart fs An Atractve Slack (NYSE:WMT) | Seeking Asha ham turned his attention from the balance sheet to the income statement when nvented the earings power method (EPV). used this method to find out if there was a difference between the earnings power te of the company and the asset-based value. If the EPV value of a company was rer than the ABV, due to, for instance, superior management or a competitive antage (EPV > ABV), the company created value. In case the EPV was equal to /, the company neither created nor destroyed value (free entry market, EPV = /). And value was destroyed if the EPV was lower than the ABV, due to, for ance, poor management. nvestor who uses the EPV method to determine value basically freezes the ipany and assumes a conservative fixed value of sustainable earnings in the re. sustainable earnings can be calculated by taking the 5- or 10-year average rating profit after tax (that is, EBIT minus the 7). Preferably, an investor adjusts for -time charges (deduct if charges happen frequently, add back if truly exceptional) potential differences between accounting depreciation and real maintenance ital expenditures. e - and this is, in my opinion, very important - this is all done without any of the ssiness of forecasting future growth. | couldn't agree more with Graham when he {: "Forecasting security prices is not properly a part of security analysis". Graham only believed it was extremely difficult to estimate future returns, he also believed st growth did not create any real value for shareholders (more on this later). jetermine the EPV value of Wal-Mart, | calculated the average sustainable aings in the last five years (in class, we only looked at the 2014 figures, so my roach is a little more conservative). See the table below: |-Mart's sustainable earnings after tax ar Mean 2014 2013, 2012 2011 2010 les $444,468.00 $476,294.00 $469,162.00 $446,950.00 $421,849.00 $408,085.01 aT $26,155.00 $26,872.00 $27,801.00 $26,558.00 $25,542.00 $ 24,002.00 hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 5125ye10112021 [A Crash Course In Value Investing From Columbia: Why Wat-Mart Is An Attractive Stack (NYSE:WMT) | Seeking Alpha x $7,753.00 $8,105.00 $7,981.00 $7,944.00 $7,579.00 $7,156.00 st $18,402.00 $18,767.00 $ 19,820.00 $18,614.00 $17,963.00 $ 16,846.00 mings re next step, sustainable earnings are divided by the cost of capital (WACC) to firm value (to all providers of capital: debt and equity), and debt is subtracted to the EPV of equity. Wal-Mart, we assumed a WACC of 7.5%, which seems reasonable, in my jion. See the table below for the calculations: / to Shareholders ‘stainable Earnings After Tax $ 18,402.00 acc 75% V Value $ 245,360.00 t Debt $ 41,246.00 'V To Shareholder $ 204,114.00 od news for Wal-Mart: The EPV of about $204 billion is clearly above the ABV of 1 billion. This indicates that the company generates more profits than the assets rant. It looks like Wal-Mart has a sustainable competitive advantage. ', Buy, Buy! Don't get too impatient. | am sorry: This article will grow into a long 4... Graham was only interested in buying if the EPV value of a company was lificantly above the current market capitalization. As can be seen in the graph ow, this is not the case. |-Mart not a BUY yet: ABV < EPV < Market Cap hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 4125ye10112021 ‘A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stack (NYSE:WMT) | Seeking Alpha, $300.00 + $260.00 $250.00 $204.00. $200.00 $151.00 $150.00 $100.00 $50.00, $- T Asset Value Earnings Power Value Market cap ze Wal-Mart's market cap is larger than both its asset-based value and earnings ver value, Graham would probably consider the shares unattractive at this nent. ortunately, due to extremely high valuations in the stock market today, Wal-Mart is on its own. | have built an EPV model in Excel that downloads data from a omberg terminal. Although this model does not make adjustments in figures, it ws very clearly that most companies in the US and abroad (except maybe for arging markets) have market values that are well above the current EPV value sed on both 5- and 10-year averages of financial figures). e that | make the same argument in this piece on Shiller's CAPE (which is ically the macro variant of Graham's EPV method). 3 horrible climate forces a value investor to do what he detests: think about jing future growth. sruce Greenwald's Franchise Value Formula ore we examine the variables of the franchise formula, | want to emphasize this: wth often comes at a high price! This is conceptually summarized in this very ple but powerful table: hitps:jIseekingalpha. comvartcle/8235426-2-crash-course-ir-value investing trom-columbia-why-wal-martis-an-atractve-stock 728ye10112021 [A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stock (NYSE:WMT) | Seeking Alpha all growth is equal tum on investment 5% 10% 20% ist of investment $10.00 $10.00 $ 10.00 t income created $ (6.00) $- $ 10.00 t value created $ (60.00) $- $ 100.00 talitative impact Value destroyed No value Value created uation Competitive disadvantage Level playing field Competitive advantage e investment is $100, and the cost of capital equals 10%. Net value created is the sent value of all future profits, or net income created divided by 10%. ay view, most companies fall in the first (value destroyed) or second category (no 1e created). There are only a few companies that have a sustainable competitive antage and create shareholder value. riers to entry are the only true source of competitive advantage (being able to do it rivals cannot do). It is beyond the scope of this article to go into details on this, it is important to note that most competitive advantages are temporary. Patents ire, new technologies get old (for instance: Xerox in copiers, and Kodak and aroid in film), and franchise companies need to invest most of the profits to ntain a triple A brand (Greenwald often uses the example that luxury car maker ‘cedes-Benz barely makes an economic profit because (the threat of) new ants force(s) the automobile manufacturer to invest a lot in advertisements, which ilts in depressed returns on capital). e that a brand by itself does not construct barriers to entry, establish competitive antages or create franchise value. Aspects of consumer behavior that lead to sumer captivity do - think of habit formation (you just always take a Coke), search ts (McDonald's (NYSE:MCD) - you might not like it, but you know what you get) hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 812511012001 |ACrash Course In Value Investing From Columbia: Why Wal-Mart fs An Atractve Slack (NYSE:WMT) | Seeking Asha switching costs (most people don't like to go through all of the trouble of opening 2w bank account) ay view, large, fast-moving consumer goods companies are most likely to have a tainable competitive advantage due to consumer captivity. These are the Coca- as, Nestlés and Unilevers of the world that | have written about in previous sles. Professors Santos made the case that even with the (very) rich valuations see today, it makes sense to invest in these special companies, because return nvestments are significantly above the cost of capital. | agree. Let's have a look if -Mart is one of those special companies. ve next chapter, | try to take a little more time to discuss all the variables. ne math: A closer look at all the variables tis section, | will discuss all the components of Bruce's formula. Most readers will amiliar with Gordon's dividend growth model, which looks like this: iis formula, P stands for the share price, D stands for dividend, R is the cost of ital and G is the growth rate of dividends. (simple) formula basically discounts all the expected dividends ("D") at the cost apital ("R"), while taking into account that the dividend grows at a constant rate "), One could rearrange the formula to get the (expected) return as the dependent able ("R"), as opposed to the share price ("P"). readers with a background in finance, this is similar to the transformation from net sent value (What is the company worth when all the future cash flows are sounted at the cost of capital?) to the internal rate of return (What discount rate is ded to equal the future cash flows to the current share price?). The formula looks this: meae ae 3 formula essentially shows that there are two components of investment returns. first component of the formula ("D/P") is the cash return an investor gets via hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 9128ye10112021 [A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stock (NYSE:WMT) | Seeking Alpha dends. The second part ("G") embodies returns that are the result of an increase hare price, due to the fact that earnings/dividends will grow in the future. re course | pursued, Professor Santos introduced Bruce Greenwald's formula that 2 it one step further and divides the "G" into two components: Growth as a sequence of investments of retained earnings, and growth that is purely organic - sales that require no/barely additional investments. The formula looks like this: E ROE Pp’ R E Expected Return = bx 5+ (-b)* +h ere b stands for the part of earnings that is distributed to investors (hence: (1 us b) is the amount of earnings that are reinvested in the business), E is earnings, E is the return on equity and h stands for the organic growth rate formula looks a little scary at first, but if you look more closely, it is not that cult to interpret: The first component, 5 *P represents the fraction of earnings that are distributed to shareholders via fividends and buybacks. You can basically see it as the "dividend-plus-share- suyback-yield”, It is extremely important to note that value matters! That is, if you vay 10 times earnings, equivalent to an earnings yield of 10% (E/P), the cash etum yield an investor gets is twice as high as in a situation where an investor vays 20 times earings (earings yield 5%) The second component, Ros (a- bye Ee represents the return a shareholders gets out of the fact that earnings that are tot given back to shareholders can be reinvested. It basically puts a price - or rate of return - on all the earnings that are made on the money that is made on nvestments out of retained earnings in perpetuity. If the return on 2quity/investment (say 20%) is twice as high as cost of capital (10%), every dollar hat is reinvested into the business is worth 2 dollars - resulting in a doubling of he returns of earnings that are not given back via dividends or buybacks. If the 20E is exactly equal to R, growth neither destroys nor creates value. If the ROE hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 102511012001 |ACrash Course In Value Investing From Columbia: Why Wal-Mart fs An Atractve Slack (NYSE:WMT) | Seeking Asha s below R, investments destroy value. Note, again, E/P is part of the formula, so value matters (high (low) E/P means a high return out of this second component of he formula. The last part ("h") represents the organic growth rate, or the percentage return an nvestor gets because the demand for products, and thus, sales and profits ncreases as the economy expands. At first, | had difficulties in grasping this sonceptually: How can you assume a company can just grow its earnings without any investments in the future? But if you look at the financial history of companies ike Nestlé and Unilever, you will see that they are able to increase their organic yrowth rate at a level which is structurally above the rate at which economies grow and most definitely above the inflation rate). Nonetheless, | advise you to be »xtremely conservative with the growth rate you pencil in, as most companies - rote the lion share of companies that do not have franchise value - have much ower, and certainly more volatile, growth rates. | also had difficulties in grasping tow can you translate a growth rate of earnings directly into expected share turns? Look at this spreadsheet to see that if you assume perpetual cash flows, his is indeed the case. at returns can long-run shareholders of Wal-Mart expect? 1e rest of this article, the long-run share return of Wal-Mart is estimated. Material 1e Columbia Business School is used, as well as some of my own king/analysis. The next section elaborates on the input variables for the three rn components - dividends, re-investments and organic growth. he dividend and share buyback return component xe first component of the formula, we need to have an idea of the return an astor gets in the form of buybacks and dividends. Professor Santos calculates an rage payout ratio of roughly 50% in the past years. The earnings of roughly $5.1 share and the current share price of $75 translates into an earings yield (E/P) of 3% (the inverse of the P/E of 15). we now have the "b" (payout ratio) and the "p" (share price, $40), we only need to 1 the "e" (earnings per share) to get the first return component of the formula. This mn will be 3.4% (50% x 6.68%) teinvestment return component hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 110511012001 |ACrash Course In Value Investing From Columbia: Why Wal-Mart fs An Atractve Slack (NYSE:WMT) | Seeking Asha e assume Wal-Mart gives back approximately 50% of its earnings, this means the 1pany could reinvest the other half. How good is Wal-Mart in reinvesting the ined earnings? Does it have franchise value? | elaborate, in the last section of this article, on how an investor can get a sonable estimate of the re-investment return of Wal-Mart. For now, we assume a rm on investment that equals about 12%. This means the company generates a 'm that is (well) above the cost of funding of 7.5%. If we fill in the numbers, we see investors in Wal-Mart will get a return out the second formula component of % (50% x $5.1/ $75x 12%/7.5%). he return related to organic growth third and final component of return simply represents the long-term organic wth rate of sales (and profits). This growth is essentially free, as it is the result of eased demand due to economic growth (no extra investment is needed). a retail company like Wal-Mart, the organic growth figure is represented by the e-store sales figure. In the last 10 years, the average same-store sales number + 1.5%, so let's pick this number. (But note that this is much, much lower than the anic growth rates of Nestlé, Unilever or Coca-Cola!) ting the pieces together vwe have all the variables we need to put into the formula. arview of the input variables time to fill in the numbers. What is a reasonable long-run return for Wal-Mart reholders? ut variables Based on 2014 numbers vidend payout 50% EPS $5.10 hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 1225ye10112021 [A Crash Course In Value Investing From Columbia: Why Wat-Mart Is An Attractive Stock (NYSE:WMT) | Seeking Alpha st price $75.00 E 12.0% ist of Capital 7.5% organic 1.5% rected long-run returns for Wal-Mart Jidend and buyback returns 3.4% tained earings retums 5.4% ganic growth retums 1.5% tal expected return 10.3% Iculate an expected return of 10.3%. At the time | was pursuing the course, the rn was lower (8.3%) due to a higher share price (read: lower earnings yield). In view, 10.3% seems a reasonably attractive retum in the current investment rate. a perfect math problem solutely love Greenwald's formula. Not because the formula has magical serties, but because it forces you to think deeply about (the few!) variables that really important when you want to assess the attractiveness of an investment: lation (probably most important!), dividend returns, reinvestment returns and anic growth rates. stay as close as possible to the beliefs of Benjamin Graham, Professor Santos ised us to use long-run averages of financial figures to estimate input variables. my own personal investments and in previous articles, | have used ten-year rages (but when available in Bloomberg, | also look at older data). It is, in my hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 132511012001 |AcCrash Course In Value Investing From Columbia: Why Wal-Mart fs An Atractve Slack (NYSE:WMT) | Seeking Asha v, extremely important for a value investor to only give company management {it for realized results - is the ROI truly bigger than the cost of capital? - and not ambitious growth plans in flashy presentations. n't stress enough that using the formula will always be an arbitrary process. But rin mind that it is not the intention here to calculate an exact return. An investor ‘ely wants want to know if the shares of Wal-Mart are, at the current price level, an active investment. en | use the formula, | always use a sanity check and ask myself which of the ‘e components has the largest contribution to the total expected return. In the e of Wal-Mart, it is obviously the reinvestment return of 5.4%. How realistic is this m? e assume a cost of capital of 7.5% makes sense (if not, please fill in a higher or er number in this spreadsheet to see how expected returns change), you have to sertain that the company can reinvest its retained earnings at 12% forever (!). The st valuable lesson of the course, | think, is that it takes blood, sweat and tears to ertain if an assumption like this is realistic. average return on investment might be 12%, but if you dig a little deeper in the ncial overviews of the annual report, you can see that the RO] numbers differ iificantly per segment. With a little bit of calculation, Professor Santos showed that reinvestment return of Wal-Mart US is absolutely magnificent at almost 20% (45% 28), Sam's Club delivers a decent return of 12.5% (10% of sales), but the mational division's return of 4.4% is absolutely horrible (45% sales). ough the retail industry is competitive, Wal-Mart clearly has an edge in the US \ fabulous distribution systems, huge economies of scale and a strong presence in 11 markets (leading to both low-cost structures and a degree of pricing power in es where Wal-Mart is the biggest retailer: these are, not coincidentally, the states are close to Arkansas, where it all started in 1962). The company also seems to able to successfully exploit its franchise value in neighboring countries Mexico and 1ada, with returns (on capital) that are similar to those in the U.S. the contrary: "Wal-Mart has yet to convincingly succeed in markets that it cannot e a truck to", to quote Professor Santos. We briefly discussed the company's xd expansion strategy in Germany from 1997 to 2006. In 2006, Wal-Mart sold its hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 14125se1ov2021 ‘A Crash Course In Value Investing From Columbia: Why WakMart Is An Attractive Slack (NYSE:WMT) | Seeking Alpha. Serman stores to Metro after recording accumulated operating losses of 4.6 billion 3 (and no profitable year). There were lots of reasons for the failure in Germany - k fierce competition, excessive regulation, bad relations with the unions and ural issues (Wal-Mart associates smiles "freaked out" German costumers when jing the stores) - but the most important factor was that the company was not able ompete with retail champions like Aldi. average ROI could be 12%, and if Wal-Mart CEO Doug McMilon decides to xst all the company’s retained earnings abroad, the marginal ROI will be a lot er (most likely below the cost of capital). internet could have a similar effect on the ROIC of Wal-Mart. Although the ipany will be able to compete in the e-commerce domain with a player like azon (NASDAQ:AIMZN) due to its huge distribution network, one cannot rule out rating margins on sales may be eaten away and converge to the levels of azon (that is, from 5-6% to close to 0%). does it make sense to invest in Wal-Mart? Professor Santos’ conclusion: Yes, "for time being the franchise is so valuable that the company can withstand bad ital allocation". | tend to agree. A lot of this has to do with the modest valuation (in arket that is grossly overvalued). My rationale is like this: Even if Wal-Mart's ROI converge to its cost of capital (so it neither creates nor destroys value), an 2stor will get a yield slightly in excess of 8% in the long run (6.8% earnings yield 3 1.5% organic growth rate). don't agree with me? Play with the assumption in this spreadsheet model to see rit alters the expected returns. losure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within \ext 72 hours, The author wrote this article themselves, and it expresses their own opinions. The author is eceiving compensation for it (other than from Seeking Alpha). The author has no business relationship any company whose stock is mentioned in this article. es. 19 Comments Like Reply Ot Like SilverYew 08 May 2016 Comments (4) Hi Smart Owl, First of all, thank you very much for sharing what you have leamt at CBS. If you don't mind, | have a few questions: 1) How do you come to 12% for the ROE/ROI? Is it taken from the historical financial statements (i.e. net income / equity?) 2) Prof Santos mentioned that Walmart has ‘bad capital allocation’. | don't quite understand what this means. If you don't mind expanding a little. Thank you! > Reply Ot Like ' Smart Owl Research 24 Jun. 2015, Comments (28) Hi alex, | am glad you liked the article. Please see chapter 5 in the book Value Investing from bruce greenwald for more information on the epv method, The method is in my opinion wonderfully explained with a case study. > Reply Ot Like ) Alex_P 49.Jun. 2015 Comments (256) ‘Smart Owl, impressive article. | just have one question: In order to calculate EPV you divide sustainable earnings (after tax) with WACC. Where did you get this formula from and how can you explain it? Thanks. SD Reply St Like (1) hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 16128ye10112021 ‘A Crash Course In Value Investing From Columbia: } Hewitt Heiserman Comments (897) Outstanding article, Smart Owl. Thank you for sharing. hewitt > Reply Ot Like jimmyg56 Comments (431) Thanks for responding to my questions. Nice article! > Reply St Like ‘Smart Owl Research Comments (26) Thanks for your questions Jimmy. Why Wal-Mart Is An Atractive Slack (NYSE:WMT) | Seeking Alpha 47 Jun. 2015 06 Jun.2015 os dun.2015 1, 1am afraid | don’t get your point. Is this the EPV method? | do take in account tax but not interest payments, therefore dividing by the WACC results in the Enterprise value and net debt should be subtracted to get the equity value. Please let me know if | am wrong 2. As mentioned, this is not an exact science. | wanted to be conservative. ‘SD Reply Op Like (1) jimmyg56 ‘Comments (431) My mistake--you used EBIT (whic! You are right, it isn't science. > Reply Or Like osun.2015 correct) not EBT. hitps:/lseckingalpha.comlartcle/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 17128ye10112021 ‘A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stack (NYSE:WMT) | Seeking Alpha, ' Smart Owl Research 06un.2015 Comments (26) Hi Philip, thanks for your question. | don't like traditional approaches to calculate the cost of capital as well — beta is very volatile and the low current rf-rate pushes down the cost of capital to extremely low levels. In the course we learned to look at more qualitative aspects to estimate the COC. Look for instance at the rate of returns private equity firms promise to their investors (this is also written down in Greenwalds great book Value Investing). If PE funds invest in risky stuff like biotech the return should be at least 16 percent. If 16 percent is for extremely risky investments, it makes sense to have a significantly lower COC for a company like Wal-mart. Professor Santos wamed that even in the low interest environment of today, the hurdle rate should not be lower than 7%. Keep in mind that calculating the COC is far from an exact science. ‘> Reply Ot Like (1) Philip Hettich orsun.2018. Comments (193) | read Greenwalds Book a few years ago. But back then | couldn't take much out of it. However, this article makes going over it again a must ;). It seems like the book is really providing answer to a lot of questions I have when it comes to applying value investing! The approach to the cost of capital makes sense. Better be too high than too low ‘on this one. Thanks again for the article. It is my favorite on SA so far > Reply Ot Like (1) ' Smart Owl Research 06 Jun.2015 ” Comments (26) Thanks Mark for your very important question. All European retailers face stiff competition from Aldi and Lid! and are losing market share, sales and margins. | live in the Netherlands (neighbor of Germany) and all the supermarkets struggle with the emerging presence of the German super discounters. To answer your question. On the one hand | am an optimist. Just as Wal-mart failed in Germany, it will be hard for Aldi and Lidl to succeed in the U.S. (note that in general the hitps:/lseckingalpha.comlartcle/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 18128ye10112021 ‘A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stack (NYSE:WMT) | Seeking Alpha, number of European companies that succeed in the US is limited). Wal-mart has a fantastic franchise, distribution system and economics of scale. However, | think the Aldi brothers deserve the utmost respect when it comes down to. how they play the retail game (no other company is run more efficiently). | still remember professor Santos words: “You don't want to play with the Aldi brothers in the sandbox’. The emergence of Aldi is something we should be looking at closely. “> Reply Ott Like (1) Jimmyg56 06 Jun. 2015 Comments (431) A couple of comments: 1) if you are using only the after tax earnings to determine value you come up with the value of the equity--not the enterprise—i.e, don't subtract net debt. To get enterprise value, you need to add to the AFter Tax earnings, the After Tax cost of debt. 2) Given the very low cost of debt, | think your WACC is high > Reply Ot Like Philip Hettich 06 Jun. 2015 Comments (193) Hey Smart Owl, Love the article. But I got a question concerning WACC. Are you using the "traditional" approach to calculate the WACC? Or is is there a different way of calculating WACC that has a workaround to come up with cost of equity? I don’t like the "beta" way of measuring cost of equity very much Best wishes & thanks again for providing this! > Reply ht Like (1) Serenity 05 Jun, 2015 Comments (1.114) > Graham turned his attention from the balance sheet to the > income statement when he invented the earnings power method (EPV). Kindly share a reference where Graham explains this method. hitps:/lseckingalpha.comlartcle/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 1912811012001 {ACrash Course In Value Investing From Columbia: Why Wat-Mar fs An Atractve Slack (NYSE:WMT) | Seeking Asha Buffett describes Graham's book - The Intelligent Investor - as "by far the best book about investing ever written’ (in its preface). In The Intelligent Investor: Graham's first recommended strategy - for casual investors - was to invest in Index stocks, For more serious investors, Graham recommended three different categories of stocks - Defensive, Enterprising and NCAV - and 17 qualitative and quantitative rules for identifying them For advanced investors, Graham described various special situations or "workouts". The first requires almost no analysis, and is easily accomplished today with a good ‘S&P500 Index fund, The last requires more than the average level of ability and experience. Such stocks are also not amenable to impartial algorithmic analysis, and require a case-specific approach. But Defensive, Enterprising and NCAV stocks can be reliably detected by today's data mining software, and offer a great avenue for accurate automated analysis and profitable investment. For example, given below are the actual Graham ratings for Wal-Mart Stores Inc (WMT), with no adjustments other than those for inflation. Defensive Graham investment requires that all ratings be 100% or more. Enterprising Graham investment requires minimum ratings of - N/A, 75%, 90%, 50%, 5%, N/A and 137%. Wal-Mart Stores Inc - Graham Ratings Sales | Size (100% =2 $500 Million): 97,130.00% Current Assets + [2 x Current Liabilities]: 48.47% Net Current Assets + Long Term Debt: 0.00% Eamings Stability (100% =» 10 Years): 100.00% Dividend Record (100% = 20 Years): 100.00% Earnings Growth (100% =» 30% Growth): 135.52% Graham Number + Previous Close: 71.84% Note: Stocks failing Graham's rules are not necessarily bad investments. They may fall under Graham's “special situations” category. Graham's rules are also extremely selective, hitps:/lseckingalpha.comlartcle/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 20128ye10112021 ‘A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stack (NYSE:WMT) | Seeking Alpha, > Reply ht Like (2) welcometothebearmarket 05 Jun. 2015, Comments (1.20K) Walmart, as of TTM, has a revenue of $485,651 (million) and is valued only at $239,200 (million; Morningstar). | would not hesitate in adding this wonderful company in my portfolio, but there is only one thing that bothers me about its industry. You have mentioned it once in your exemplary article. | am referring to Aldi, and its increasing presence in the U.S. Previously, | found myself purchasing much of the fallen Sainsburry company (OTCMKTS:JSAIY) as its market price suffered, along with other big UK retailers, secondary to increased competition found in their country brought by Aldi and Lidli discount stores (http://bit.ly/1RNZq2c) Now, | am not an expert in determining whether or not Aldi will eat up more sales from WMT. But according to my observation and other articles (http://bit.ly/1 RNZnne); (http://onforb.es/4RNZq2f) Jam assuming that there is indeed an emerging threat, Here in Texas, most people do not mind travelling >30 miles in reaching the next nearest WMT to buy discounted stuff. As | have observed Aldi has been popping up in different small cities (such as Brownwood, Tx ~19,000 population and Corsicana, Tx ~24,000 population). Some articles also states that Aldi appears to be determined in opening more stores in the future (http://onforb.es!1RNZq21) and (http://mnstr.me/1 RNZnnh), This might be just in Texas. But how does that affect your conviction of buying WMT? In addition, | found an out-of-date article stating that Aldi plans to further expand its stores (hitp://bit.ly/1RNZaiE). | would appreciate you commenting on this Smart Owl Research. > Reply Ot Like KrijnD 04 Jun. 2018 Comments (3) Great article. Like the tool to play with assumptions. > Reply Ot Like (1) Jono83 04 Jun. 2015 hitps:/lseckingalpha.comlartcle/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 21128ye10112021 [A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stack (NYSE:WMT) | Seeking Alpha, Comments (701) A lot of people would say WMT's largest competitor is Amazon or similar. > Reply Ott Like (4) alphaodyssean ot Jun.2015 ‘Comments (98) Who is WMTs largest competitor? TGT. How much distance is between them? huh. what is their ratio of sales... WMT / TGT...oh gotcha....10: 4 In what quarter in the last 50 or so years did WMT post a loss? 0. In what QTR in the last 50 years did WMT, not have increasing sales and earnings? 0 from this, we see these simpletons are headed in the right direction it seems and its unlikely to wake up with a hangover and a takeover. Who is the largest property owner (not mineral rights) in America? WMT what does that mean? partial hedge against inflation. How much of WMTs sales are international? 50 percent or more from 22 countries..why? Hedge against currency risk. who is the smartest man in history? possibly Sam Walton. Why? because he created a system that dullards could operate effectively in his absence and they stack em high n deep at home office. S Reply Ot Like (3) JMajoris ddan. 2018. Comments (1.40K) Very impressive > Reply Ot Like hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 22128ye10112021 [A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stack (NYSE:WMT) | Seeking Alpha, hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 23128ye10112021 [A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stack (NYSE:WMT) | Seeking Alpha, hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 24128ye10112021 [A Crash Course In Value Investing From Columbia: Why Wal-Mart Is An Attractive Stack (NYSE:WMT) | Seeking Alpha, hitps:/lseckingalpha.comlartce/2236426-2-crash-course-in-value-investing trom-columbis-why-wal-marts-ar-atractve-stock 25128