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  • Abstract

    WALMART VS AMAZON Economist 2016 Investment Case Competition

    sponsored by RealVision

    Cole Buckley, Pete DeFina and Lindsay Root

    Over the next 10 years Walmart stock will outperform Amazon because:

    Combining brick-and-mortar with e-commerce is a winning strategy: Although the growth of e-commerce is impressive, brick-and-mortar

    stores still account for 90% of retail revenues. Walmart is better positioned as an

    omni-channel retailer given its global store network and strong online presence.

    Early entry in China will pay dividends as countrys middle class booms: The

    growth of the Chinese middle class will alter global consumption trends in the next

    decade. Walmart has been laying the foundation to meet this demand and is

    accelerating expansion in China.

    Earnings, not dreams, drive value: Walmart has proven it can deliver long-term

    profitable growth. Comprehensive strategy and operational excellence will

    continue to provide above average profitability.

    Strong balance sheet and robust free cash flow provide low cost capital to support growth: Relatively low debt insulates Walmart from rising rates.

    Undervalued stock will provide most value to shareholders: Conservative DCF

    model shows the market is significantly mispricing Walmarts stock.

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    Table of Contents Walmart vs Amazon .................................................................................................................. 2

    Industry Summary ...................................................................................................................... 2

    Company Overviews .................................................................................................................. 3

    Amazon .................................................................................................................................. 3

    Walmart .................................................................................................................................. 4

    Market Position & Analysis ....................................................................................................... 5

    Walmart is positioned to become the leading omni-channel retailer ..................................... 5

    Walmart is able to capture growth in Asian middle class ...................................................... 7

    Walmarts global network provides competitive advantage .................................................. 9

    Financial analysis ..................................................................................................................... 10

    Walmart has above average profitability and a strong history of profitable growth ............ 10

    Walmarts conservative capital structure makes it easy to raise capital and reduces impact of rising rates ........................................................................................................................ 11

    Valuation .................................................................................................................................. 12

    P/OIPS .................................................................................................................................. 12

    Discounted Free Cash Flow ................................................................................................. 14

    Conclusion ............................................................................................................................... 16

    Works Cited ............................................................................................................................. 17

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    Walmart vs Amazon Amazon and Walmart have become ubiquitous, household names in the US and for good

    reason: both of these companies have revolutionized the way in which we shop. Amazon offers

    a convenient experience, and an ever-expanding selection of products whereas Walmart has a

    wide network of store locations and famously low prices. As investments, these companies

    highlight the dichotomous nature of the retail industry brick-and-mortar vs e-commerce; high

    growth vs steady growth; US vs International; actual vs market expectations. To coalesce these

    stark differences, we will first summarize the industry and these companies, followed by an

    analysis of market position and financials, and finally an analysis of the firm valuation, all of

    which point to Walmart as the clear investment over the next 10 years.

    Investment decision: Buy WMT

    Industry Summary

    For the ease of comparison, weve grouped both Amazon and Walmart into retail, however,

    the industry forces that drive each of these companies are distinctly different and the firm that

    is best able to leverage these forces will ultimately make a better investment for the next 10

    years.

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    Table 1: Industry Summary1

    Industry E-commerce and Online Auctions in the US

    Warehouse Clubs & Supercenters in the US

    Department Stores in the US

    Key Drivers Per capita disposable income Number of mobile internet connections Percentage of services conducted online

    World price of crude oil

    Life cycle stage:

    Growth Mature Decline

    Concentration Level:

    Low HHI 250 High HHI 5,000

    High HHI 2,000

    Technology Change:

    High Medium Medium

    Barriers to Entry:

    Low High Medium

    Threats High reliance on shipping companies (FedEx, UPS, etc.). Operating profits limited when oil prices are high. Membership (like Prime) limits ability to pass higher costs onto customers.

    Gas stations generate large portion of industry revenue.

    E-commerce sites are better positioned due to low overhead costs, offering lower prices and wider inventories.

    Opportunities Disposable income levels determine quantity and quality of online purchases

    Integrate in-store and online for personalized customer experience

    Company Overviews

    Amazon

    Amazon.com, founded in 1994 by current CEO Jeff Bezos, is the largest internet-based retailed

    in the US. They maintain three different operating segments: North America, International, and

    1 (IBIS World, 2015)

  • 4

    Web Services. In Q2 of 2015, Amazon reported $23 billion in sales of which North America

    represented 60%, International 32%, and Web Services 8%.2 Amazon currently sells over 300

    million products in a variety of categories. Its retail operation encompasses many different

    business models Amazon Retail, Amazon Marketplace, and Amazon Web Services. In

    Amazon Retail, the company purchases and takes possession of inventory in which it stores in

    one of its 743 distribution centers in the US. In Amazon Marketplace, third party sellers are

    able to list items on Amazons website and the seller pays a fee to Amazon. Amazon Web

    Services is cloud-computing platform providing services like online storage and virtual

    servers.4

    Walmart

    Walmart, founded in 1962 by Sam Walton, was the worlds largest company by revenue5. Its

    operating segments include Sams Club, Walmart US, and International. In Q2 of 2015,

    Walmart reported $119 billion in sales of which Walmart US represented 62%, International

    26% and Sams Club 12%.6 Sales are generated predominantly through one of its 11,526 stores

    throughout the globe. Walmart also generates sales through its website Walmart.com, however

    less than 3% of sales are generated online.7 Evolving to compete in the digital space, Walmart

    is moving from a traditional brick-and-mortar retail store to an omni-channel model which

    includes online sales.8

    Table2: Selected Company Metrics9

    Company Name Walmart (WMT) Amazon (AMZN)

    Employees 2.2 Million 154,000

    Shareholders 250,000 2,744

    2 (Amazon, 2015) 3 (MWPVL, 2015) 4 (Amazon, 2015) 5 (Fortune, 2015) 6 (Walmart, 2015) 7 (Forbes, 2015) 8 (Walmart, 2015) 9 (Mergent Online, 2015)

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    Market Cap $187 Billion $307 Billion

    Revenue 486 Billion 100.5 Billion

    Net Income 15.5 Billion 328 Million

    Dividend 1.95 N/A

    Dividend Yield 3.33% N/A

    Share Price $58 $655

    Market Position & Analysis

    Walmart is positioned to become the leading omni-channel retailer

    Retailers have realized that the future of retail is offering goods and services through tightly

    integrated digital and physical channels. A 2014 study by A.T. Kearney found that a majority

    of customers prefer online shopping for product discovery and delivery, and physical stores for

    product testing and returns.10 In fact, two-thirds of the customers purchasing online use a

    physical store either before or after the transaction.11 The tradeoff in customer preferences

    between online and physical stores is driving an increasing amount of retailers to adopt an

    omni-channel model. Successful online retailers such as Microsoft and Athleta are now

    opening brick-and-mortar locations as part of a blended retail strategy. On the other hand,

    traditional brick-and-mortar retailers are making large investments to improve its online

    presence.

    Walmart CEO Doug McMillon said I want us to stop talking about digital and physical retail

    as if theyre two separate things, the customer doesnt think of it that way, and we cant either.

    McMillon