Analyst's Notes. Argus Recommendations

Transcription

1 Report created Aug 19, 2016 Page 1 OF 7 Wal-Mart is the world's largest retailer. In the fiscal year ended January 31, 2016, sales were $479 billion. The company has three segments: Wal-Mart Stores, which accounted for about 60% of sales; Sam's Club, a membership warehouse chain, which comprised 12% of revenue; and the International segment, which generated 28% of sales. The company, based in Bentonville, Arkansas, ended fiscal 2016 with about 11,500 retail units in about 28 countries. Groceries are the largest produce category in the U.S. market, at approximately 56% of sales. E-commerce sales were over $12 billion in FY16. Analyst's Notes Analysis by Christopher Graja, CFA, August 18, 2016 ARGUS RATING: HOLD Earnings and comp sales top consensus On an adjusted non-gaap basis, WMT earned $1.07 per share in 2Q17. This was down from $1.08 in 2Q16, but above our estimate and the StreetAccount consensus of $1.02. Comparable sales at Wal-Mart U.S. rose 1.6%, above the StreetAccount consensus of 1.0%. E-commerce growth boosted Wal-Mart U.S. comps by 40 basis points in 2Q, and total e-commerce sales rose 11.8% in constant currency. In the just completed 2Q17, trailing 12-month ROI declined by 70 basis points to 15.5%, while adjusted operating income fell 5.5%. Average invested capital actually fell 1.1%. We were pleased to see that capital stopped growing, and will be looking for continued capital discipline. INVESTMENT THESIS We are maintaining our HOLD rating on Wal-Mart Stores Inc. (NYSE: WMT). Our thesis is simple: we believe that Wal-Mart must significantly improve its return on invested capital to become a multiyear outperformer. Home Depot provides a useful road map for potential improvement at WMT. Based on Bloomberg data, Wal-Mart ended FY11 with an ROIC of 14.6% and FY16 with an ROIC of 12.5%. By contrast, Home Depot ended FY11 with an ROIC of 12.8% -- about 180 basis points lower than WMT - but ended FY16 with an ROIC of 26.9%, more than twice as high as WMT. Over the last five years, the S&P 500 has delivered an annualized return of 13.3%. Wal-Mart has underperformed, with an annualized return of 9.5%. By contrast, HD has nearly tripled the return of the index, with an annualized return of more than 34%. (We did not tinker with the date range: we simply used the Bloomberg comparative returns screen as it is configured.) It is hard to be confident of many things on Wall Street, but we are confident that WMT will outperform if it can consistently boost ROIC. Data Pricing reflects previous trading week's closing price. 200-Day Moving Average Price ($) 90 Rating EPS ($) Week High: $ Week Low: $70.89 Closed at $71.14 on 8/26 Quarterly Annual ( Estimate) 4.35 ( Estimate) Revenue ($ in Bil.) Quarterly Annual ( Estimate) ( Estimate) FY ends Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Jan BUY HOLD SELL Argus Recommendations Twelve Month Rating SELL HOLD BUY Five Year Rating SELL HOLD BUY Rating Weight Under Over Weight Weight Argus assigns a 12-month BUY, HOLD, or SELL rating to each stock under coverage. BUY-rated stocks are expected to outperform the market (the benchmark S&P 500 Index) on a risk-adjusted basis over the next year. HOLD-rated stocks are expected to perform in line with the market. SELL-rated stocks are expected to underperform the market on a risk-adjusted basis. The distribution of ratings across Argus' entire company universe is: 47% Buy, 47% Hold, 6% Sell. Key Statistics Key Statistics pricing data reflects previous trading day's closing price. Other applicable data are trailing 12-months unless otherwise specified Overview Price $74.30 Target Price Week Price Range $56.30 to $75.19 Shares Outstanding 3.12 Billion Dividend $2.00 Overview Consumer Staples Rating MARKET WEIGHT Total % of S&P 500 Cap % Financial Strength Financial Strength Rating MEDIUM-HIGH Debt/Capital Ratio 35.7% Return on Equity 16.9% Net Margin 3.0% Payout Ratio 0.45 Current Ratio 0.93 Revenue $ Billion After-Tax Income $14.73 Billion Valuation Current FY P/E Prior FY P/E Price/Sales 0.48 Price/Book 3.03 Book Value/Share $24.55 Capitalization $ Billion Forecasted Growth 1 Year EPS Growth Forecast -3.72% 5 Year EPS Growth Forecast 2.00% 1 Year Dividend Growth Forecast 2.04% Risk Beta 0.70 Institutional Ownership 29.29%

2 Report created Aug 19, 2016 Page 2 OF 7 What exactly does WMT have to do? Very simply, the retail giant has to grow income faster than sales and sales faster than its capital base. The implication is that it is not enough to simply boost earnings by opening more mildly profitable stores or to boost comp sales by stuffing stores with more inventory. Since the end of FY11, WMT has increased square footage by 17%. During this period, sales have declined to $422 per square foot from $435, and EBIT has declined to $21 per square foot from $26, according to Bloomberg data. Meanwhile, HD has increased square footage by just 1% over the same period. But HD sales have increased to $374 per square foot from $289, and EBIT has doubled from $25 per square foot to $50. Our intent isn't to be judgmental. We simply want to show that megacap retailers have the potential to outperform if they follow the HD roadmap, and get operating and capital efficiency on track. We thus believe that WMT has a significant opportunity to improve. However, rather than speculate on whether this will actually occur, we want to see tangible results. In the just completed 2Q17, trailing 12-month ROI declined by 70 basis points to 15.5%, while adjusted operating income fell by 5.5%. Average invested capital actually fell 1.1%. We were pleased to see that capital stopped growing, and will be looking for continued capital discipline. On the income side, WMT's success in driving traffic and comp sales in 1H were certainly positives. We are optimistic about the company's new plan to invest more in its staff. Based on the stores we visit, the company has a significant opportunity - and need - to provide better in-store service, have the shelves better stocked, and have faster checkout times. The challenge for management will be to make sure that a better shopping experience translates into attractive returns on incremental investments. To his credit, the new head of the U.S. stores has made it a priority to fix 'the basics.' We are also pleased by the company's recent plan to close stores. We want to see management more focused on the productivity of the U.S. big-box stores. While the closings are an encouraging step, we believe that they represent only about 1% of sales. In the event of an upgrade, WMT might make most sense for income-oriented equity portfolios. WMT has a dividend yield of 2.8% and we expect continued slow growth in the quarterly payout. On the negative side, we remain concerned that it will be hard to raise margins in a world where Amazon seems obsessed with lowering prices to gain market share. That said, Kroger has thrived by offsetting lower gross margins with greater efficiency, suggesting that there is a similar opportunity for WMT. RECENT DEVELOPMENTS On August 18, Wal-Mart reported second-quarter GAAP earnings from continuing operations of $1.21 per share, which includes a $0.14 per share gain on the sale of Yihaodian, a Chinese e-commerce site. Growth & Valuation Analysis GROWTH ANALYSIS ($ in Millions, except per share data) Revenue 446, , , , ,130 COGS 334, , , , ,984 Gross Profit 111, , , , ,146 SG&A 85,025 88,629 91,353 93,418 97,041 R&D Operating Income 26,491 27,725 26,872 27,147 24,105 Interest Expense 2,159 2,063 2,216 2,348 2,467 Pretax Income 24,332 25,662 24,656 24,799 21,638 Income Taxes 7,924 7,958 8,105 7,985 6,558 Tax Rate (%) Net Income 15,699 16,999 16,022 16,363 14,694 Diluted Shares Outstanding 3,474 3,389 3,283 3,243 3,217 EPS Dividend GROWTH RATES (%) Revenue Operating Income Net Income EPS Dividend Sustainable Growth Rate VALUATION ANALYSIS Price: High $77.60 $81.37 $88.09 $90.97 Price: Low $57.18 $67.72 $72.27 $56.30 Price/Sales: High-Low P/E: High-Low Price/Cash Flow: High-Low Financial & Risk Analysis FINANCIAL STRENGTH Cash ($ in Millions) 7,281 9,135 8,705 Working Capital ($ in Millions) -8,160-1,975-4,380 Current Ratio LT Debt/Equity Ratio (%) Total Debt/Equity Ratio (%) RATIOS (%) Gross Profit Margin Operating Margin Net Margin Return On Assets Return On Equity RISK ANALYSIS Cash Cycle (days) Cash Flow/Cap Ex Oper. Income/Int. Exp. (ratio) Payout Ratio The data contained on this page of this report has been provided by Morningstar, Inc. ( 2016 Morningstar, Inc. All Rights Reserved). This data (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. This data is set forth herein for historical reference only and is not necessarily used in Argus analysis of the stock set forth on this page of this report or any other stock or other security. All earnings figures are in GAAP.

3 Report created Aug 19, 2016 Page 3 OF 7 On an adjusted, non-gaap basis, WMT earned $1.07 per share in 2Q17, which was down from $1.08 in 2Q16, but above our estimate and the StreetAccount consensus of $1.02. WMT provided 3Q17 adjusted EPS guidance of $0.90-$1.00, compared to $1.03 in the third quarter of last year and a prerelease consensus of $0.93. Our prerelease estimate had been $0.91. The company provided full-year adjusted EPS guidance of $4.15-$4.35, up from a prior $4.00-$4.30. The prerelease consensus was $4.26. There are two items in the adjusted guidance that are not strictly comparable. First, the guidance now includes $0.05 per share in 4Q costs related to the planned acquisition of Jet.com (assuming that the deal closes at the beginning of 4Q). Second, management now expects the full-year tax rate to be at the low end of its previous forecast. In the second quarter, comparable sales at Wal-Mart U.S. were up 1.6%. This was above the StreetAccount consensus, which called for comparable growth of 1.0%. CEO Doug McMillon said that customer satisfaction scores are increasing and that the U.S. Stores team is doing a better job of managing inventories. He cited this as a driver for seven consecutive quarters of comparable traffic increases in the U.S. division. Same-store sales at Sam's Club were up 0.6%, excluding fuel. The StreetAccount consensus called for a 0.1% decrease. Sales of fresh foods were down due to deflation, and sales in the consumer electronics department were hurt by weak sales of televisions. Total revenue of $120.9 billion (which includes membership fees) rose 0.5%. This was below our estimate of $121.4 billion but above the StreetAccount consensus of $120.2 billion. Membership fees and other fees increased 61% to $1.44 billion and were above our estimate of $917 million. Excluding the $535 million gain on the sale of Yihaodian, 'fees and other' were $914 million, which basically matched our estimate. Comparable traffic was up 1.2% and the average ticket was up 0.4% at Wal-Mart U.S. E-commerce growth helped Wal-Mart U.S. comps by 40 basis points in the second quarter. Total 2Q e-commerce sales rose 11.8% on a constant-currency basis, though management would like them to grow faster. Management expects 3Q17 comps at U.S. Wal-Mart stores to be up 1.0%-1.5%. Sam's Club posted a 0.4% decline in comp traffic and a 1% increase in the average ticket, despite deflation. Management seemed pleased with the division's online performance. For 3Q, Sam's expects comparable sales (excluding fuel) to be slightly higher. Full-company operating income of $6.17 billion was up 1.6% in 2Q on a GAAP basis. Excluding the gain on Yihaodian, operating income fell 7.2% to $5.6 billion, still above our estimate of $5.4 billion. The adjusted operating margin was 4.66% versus 5.05% a year earlier. Our estimate was 4.43% and the StreetAccount consensus was 4.6%. Operating expenses rose 53 basis points on higher Peer & Industry Analysis The graphics in this section are designed to allow investors to compare WMT versus its industry peers, the broader sector, and the market as a whole, as defined by the Argus Universe of Coverage. The scatterplot shows how WMT stacks up versus its peers on two key characteristics: long-term growth and value. In general, companies in the lower left-hand corner are more value-oriented, while those in the upper right-hand corner are more growth-oriented. The table builds on the scatterplot by displaying more financial information. The bar charts on the right take the analysis two steps further, by broadening the comparison groups into the sector level and the market as a whole. This tool is designed to help investors understand how WMT might fit into or modify a diversified portfolio. P/E WMT Value 5-yr Growth Rate(%) 5 10 Growth COST 5-yr Net 1-yr EPS Cap Growth Current Margin Growth Argus Ticker Company ($ in Millions) Rate (%) FY P/E (%) (%) Rating WMT Wal-Mart Stores Inc 231, HOLD COST Costco Wholesale Corp 73, BUY Peer Average 152, P/E Price/Sales Price/Book PEG 5 Year Growth Debt/Capital

4 Report created Aug 19, 2016 Page 4 OF 7 compensation and technology spending. Sales (not including membership fees) rose 0.1% for the quarter, to $119.4 billion. Our estimate was $120.5 billion. Without the currency impact, total revenue would have increased 2.8%. International sales decreased 6.6%, to $28.6 billion, but were up 2.2% in constant currency. Comp sales were positive in Mexico, Canada and Brazil. They decreased slightly in China. U.K. comps were down 7.5% on a 6.0% decline in traffic. We believe the issue hurting the U.K business is fierce competition. Total company gross margin increased by 53 basis points, to 25.06%. Our estimate was 24.2%. The StreetAccount consensus was 25%. The gross margin in U.S. stores rose 33 basis points, with improvements in food, consumables and healthcare products. WMT is seeing some benefit from acquiring products at lower prices. As a percentage of sales, selling, general and administrative expenses matched our estimate of 20.5%. On a year-over-year basis, they were 30 basis points higher as a percentage of sales. Excluding the revenue benefit of the Yihaodian sale, SG&A would have been approximately 20.9%. The StreetAccount consensus was 20.8%. Digging a bit deeper, we note that the expense rate for U.S. stores rose 90 basis points, primarily due to store investments and wage increases that were implemented in February. Net interest expense was $566 million, just below our forecast of $570 million. Cash flow from operations was $14.9 billion in 1H17 versus $10.1 billion in the prior-year period. A major factor was that WMT's inventories were a source of cash in 1H17 rather than a use of cash, as they were in 1H16. The trailing 12-month return on capital declined to 15.5% in 2Q17 from 16.2% in the prior-year period. This downtick was the result of a 5.5% decrease in operating income. Average invested capital was actually down 1.1%. While this is hardly a significant move, we will be watching to see if WMT can grow earnings by making existing stores more productive, as Home Depot has done so effectively. WMT's return on capital has fallen significantly from 18.1% in FY13. EARNINGS & GROWTH ANALYSIS We are raising our FY17 EPS estimate to $4.40 from $4.15, with five cents of this change coming from the better-than-expected 2Q earnings on an apples-to-apples basis. Another fourteen cents reflects the gain on the sale of Yihaodian. The remainder of the increase comes from a slightly lower tax rate and our expectations for slightly higher comp sales. The company's GAAP guidance is now $4.29-$4.49. Our 3Q estimate is $0.94. The company's 3Q guidance is $0.90-$1.00. We are raising our FY18 EPS estimate to $4.35 from $4.25, primarily reflecting a small increase in our sales forecast. This does not assume a repeat of the $0.14 per share gain on the Yihaodian sale. Our five-year earnings growth rate estimate is 2%. We expect FY19 EPS to be approximately flat with FY16, and are modeling approximately 5% EPS growth in both FY20 and FY21, to about $5.00. FINANCIAL STRENGTH & DIVIDEND Our financial strength rating for Wal-Mart remains Medium-High, the second-highest rank on our five-point scale. The credit agencies give the company ratings in the AAs, and outlooks are stable. The company's commercial paper ratings are top tier, A1/P1. We believe this is a real advantage at times when the credit market is jittery, although we don't think Wal-Mart is likely to have any difficulty borrowing money. WMT had $7.7 billion in cash and equivalents on the balance sheet at the end of the second quarter. Total debt/capital was about 38%, which is in line with the company's target. WMT's market position, earnings stability and real estate ownership are all very solid even allowing for a couple of difficult years. Moreover, we think the company's sales of food and medicine, which tend to depress margins, add to earnings stability as well as inventory turnover and store traffic. In our opinion, it might be difficult for a competitor to topple a low-cost, high-volume retailer like WMT or Costco because it is so hard to get the inventory management and logistics right. It also takes considerable capital to build the necessary computer systems, distribution centers, transportation and stores. Margins are a bit lower than we would normally look for in a company with a High financial strength rating, and WMT's debt is not exceptionally low. Wal-Mart owns about 86% of its domestic discount stores, supercenters and neighborhood markets and 85% of Sam's Clubs locations. This is a high percentage relative to many other retailers we follow. In some additional cases, WMT owns the building and leases the land. The company has a combination of owned and leased properties outside the U.S. We believe that approximately one-third of those properties are owned. The balance sheet lists the value of property and equipment at about $109 billion net of depreciation, down from $113 billion a year earlier. We believe that about 70% of the pre-depreciation value is in land and buildings. Treating operating leases as debt, we estimate that the present value of leases at about $12.5 billion, which puts adjusted debt at approximately 43% of capital, which is slightly below average for retailers we follow. We estimate that lease-adjusted debt was about 2-times EBIT plus depreciation and rent at the end of FY12 and FY13. It was about 1.9-times in FY11. This is a very solid level relative to other retailers we follow. Adjusted debt was approximately 2.1-times in FY14 and 1.8-times in FY15 and FY16. We believe that investors are going to hold management's feet to the fire to make sure that the company uses its capital as productively as possible. Trailing ROI was 15.5% in FY16, 16.9% in FY15, 17% in FY14, 18.1% in FY13, 18.6% in FY12 and 19.2% in FY11. The company paid dividends of $0.95 in FY09 and $1.09 in FY10. WMT raised the quarterly dividend to $ per share from $ in March. Dividend payments totaled $1.21 per share in FY11, $1.46 in FY12, $1.59 in FY13, $1.88 in FY14, $1.92 in FY15 and $1.96 in FY16. In the 4Q release, the company announced a dividend increase to $2.00 for FY17. We are maintaining our FY17 estimate at $2.00. According to management, Wal-Mart has increased its payout every year since it first declared a dividend in We expect a very small dividend increase in FY18, to $2.04 per share. The company repurchased about $7.3 billion of its stock in FY10, $14.8 billion in FY11, and $6.3 billion in FY12. In FY13, it repurchased $7.6 billion. WMT repurchased $6.7 billion of its stock in FY14, $1 billion in FY15, and $4.1 billion in FY16. WMT recently authorized a new $20 billion repurchase plan that it expects to complete in two years. At the end of 2Q17, the company had a remaining authorization of $12.6 billion.

5 Report created Aug 19, 2016 Page 5 OF 7 MANAGEMENT & RISKS Even Wal-Mart faces intense competition from Amazon and online retailers. This is especially true in categories like entertainment and electronics. But Wal-Mart's size, distribution capabilities, focus on low prices and emphasis on food and other low-margin consumer product leave it better positioned than most retailers. In late June 2010, Bill Simon became president and CEO of Wal-Mart U.S. He had a number of accomplishments at the company, including the $4 generic program. In July of calendar 2014, Mr. Simon was replaced by Greg Foran who had been President and CEO of Wal-Mart Asia. Mr. Foran seems to be devoting a lot of attention to 'Shopkeeping 101,' or the very basics of running a retail store, which we commend. Over the last few years, Wal-Mart has made a significant effort to improve its image in the U.S., which was somewhat marred by the allegations of bribery in Mexico that were published by the New York Times. Then CEO Mike Duke said that the company was working to determine what happened and would take aggressive action if violations of the law or company policies occurred. The company is also aware of allegations related to violations of the Foreign Corrupt Practices that may have occurred in Brazil, China and India. WMT incurred $157 million of costs in FY13 and $282 million in FCPA expenses in FY14 and $173 million in FY15. Management does not believe that the issue will have a material adverse impact on the business. Materiality is obviously a high bar for a company with over $480 billion in annual sales, $8 billion of cash, and $200 billion of assets. Doug McMillon recently replaced Mr. Duke as CEO. Mr. McMillon started as an hourly associate in 1984 and has since served as CEO of Sam's and the International business. We believe that the company's response to natural disasters, the initiative to cut medicine prices, programs to be more environmentally conscious, the settlement of class-action lawsuits, and a new plan to hire military veterans are all steps toward improving the company's image. WMT also took a very active role following the earthquake and tsunami in Japan. Wal-Mart has taken very visible steps to improve healthcare for its employees and to become more environmentally friendly. The recent initiative to increase training and wages should also help. We believe that the banking and financial crisis probably improved WMT's image. The company has created jobs as other companies fired workers and it continued to grow as financial firms went bankrupt or required billions in public money. The company is involved in a range of litigation including various suits that allege unfair treatment of female employees. These issues are discussed in the annual report. As the company continues to expand, market saturation and ongoing cannibalization within and among Wal-Mart's various formats in its main U.S. market pose significant risks. Management has noted that it would rather split sales among its own formats than cede them to competitors. We have previously been critical of the company's store environment, which can be cluttered. It appears that customers liked the stores with less merchandise in the aisles, but they don't necessarily buy more. We still believe that WMT as a whole has room to improve if it is to reach the level of in-store execution as the Target stores we visit. Several years ago we walked a store with Blake Nordstrom. He was very quick to recognize that the competition is no longer made up of just immediate brick-and-mortar peers. Shoppers compare any experience with that available from a range of best-in-class companies. For Wal-Mart, these may include, Amazon, Zappos, L.L. Bean and Whole Foods. A risk related to international expansion is that the company may not be embraced warmly in some overseas markets; it may also have to deal with unfamiliar regulations and is likely to face volatile currency fluctuations. We believe that there is also a risk that the company may not be able to gain the scope to maximize profits in some markets. The counter point is that everyone likes to save money and WMT has the potential to use its buying power and logistical expertise to offer low prices on items that are relevant and desired in markets outside the U.S. Currency fluctuation is an ongoing risk. A strong dollar hurts earnings as foreign profits are translated into fewer dollars. A weak dollar might be a bigger long-term threat because it could cost Wal-Mart more to purchase the large number of items it imports from Asia. The economy is a risk for all retailers because of their sensitivity to changes in consumer discretionary spending. Wal-Mart has often been somewhat insulated from downturns in consumer spending, given its low-price leader status and the growing number of food items that it sells. However, the discounters have been hit harder by price hikes for gasoline and other commodities, which disproportionately affect the discretionary income of lower-income consumers. Deflation can also be a challenge as it can reduce unit revenue on selected products such as groceries. An additional risk is that management may simply stumble in executing one or more of its various strategies, from real-estate acquisition to cost control, product mix and employment practices. Despite a range of risk factors, we don't think Wal-Mart is affected by a very important risk for retailers - irrelevance. A great many retailers could easily be replaced or vanish completely, but we believe that there is a need for Wal-Mart. It plays an important role in the economy. Its buying power, inventory management and logistical prowess represent a real barrier to entry. The Walton family controls approximately half of the company's outstanding shares. COMPANY DESCRIPTION Wal-Mart is the world's largest retailer. In the fiscal year ended January 31, 2016, sales were $479 billion. The company has three segments: Wal-Mart Stores, which accounted for about 60% of sales; Sam's Club, a membership warehouse chain, which comprised 12% of revenue; and the International segment, which generated 28% of sales. The company, based in Bentonville, Arkansas, ended fiscal 2016 with about 11,500 retail units in about 28 countries. Groceries are the largest produce category in the U.S. market, at approximately 56% of sales. E-commerce sales were over $12 billion in FY16. VALUATION Over the last year, Wal-Mart shares have returned about 10%. The shares are currently trading at about 17-times our FY17 EPS forecast and 17-times our FY18 forecast. The current-year multiple is just below the S&P 500's multiple of 18-times our current-year estimate. We believe this is reasonable. Wal-Mart is a mature business and is facing earnings pressure as it raises employee wages and invests in e-commerce capabilities. The company still has a strong balance sheet and solid cash flow

6 Report created Aug 19, 2016 Page 6 OF 7 generation. On a relative trailing basis, WMT is trading at a 15% discount to the S&P 500's trailing multiple, which is slightly deeper than the five-year average of a 10% discount. We believe that the company will need to improve ROI and comparable sales to see higher multiples on an absolute and relative basis. WMT trades at a forward-four-quarter P/E of 17, which is below the median of 19 for its mass-merchant peers. We believe that the company's financial strength argues for a premium multiple, but a soft earnings outlook suggests a discount until the market sees an inflection point. The company's consensus growth rate, which has recently declined to 3% from 6% is now well below the group median of about 11%.WMT has raised its dividend every year since it initiated a payout in Over the last five years, the company has raised the dividend at an annual rate of 8%, but we expect slower growth over the next few years. WMT's indicated dividend yield is 2.7%. We believe this is attractive at a premium to the 10-year Treasury yield. Based on a simple discounted earnings model that assumes earnings of $5 per share in 4.5 years (helped by share repurchases) and that the shares trade at a terminal multiple of 18, the shares would be worth about $65, which is slightly below the current stock price. We're using a discount rate of 8%. The terminal multiple is slightly above the five-year average of approximately 15-times on a trailing basis because the company should be emerging from the downturn we expect over the next few years. WMT shares trade at an enterprise value of about 11.5-times trailing EBIT, versus a five-year average of The range for the period is 9-to 13-times. We think the current multiple is fair given WMT's market position, financial strength, and earnings challenges. Based on WMT's financial strength, it could move higher, though it will likely be constrained until earnings growth accelerates. In a future note, we will dig deeper into the company's levers for making its capital more productive and increasing shareholder value. On August 18, HOLD-rated WMT closed at $74.30, up $1.37.

7 METHODOLOGY & DISCLAIMERS Report created Aug 19, 2016 Page 7 OF 7 About Argus Argus Research, founded by Economist Harold Dorsey in 1934, has built a top-down, fundamental system that is used by Argus analysts. This six-point system includes Industry Analysis, Growth Analysis, Financial Strength Analysis, Management Assessment, Risk Analysis and Valuation Analysis. Utilizing forecasts from Argus Economist, the Industry Analysis identifies industries expected to perform well over the next one-to-two years. The Growth Analysis generates proprietary estimates for companies under coverage. In the Financial Strength Analysis, analysts study ratios to understand profitability, liquidity and capital structure. During the Management Assessment, analysts meet with and familiarize themselves with the processes of corporate management teams. Quantitative trends and qualitative threats are assessed under the Risk Analysis. And finally, Argus Valuation Analysis model integrates a historical ratio matrix, discounted cash flow modeling, and peer comparison. THE ARGUS RESEARCH RATING SYSTEM Argus uses three ratings for stocks: BUY, HOLD, and SELL. Stocks are rated relative to a benchmark, the S&P 500. A BUY-rated stock is expected to outperform the S&P 500 on a risk-adjusted basis over a 12-month period. To make this determination, Argus Analysts set target prices, use beta as the measure of risk, and compare expected risk-adjusted stock returns to the S&P 500 forecasts set by the Argus Strategist. A HOLD-rated stock is expected to perform in line with the S&P 500. A SELL-rated stock is expected to underperform the S&P 500. Argus Research Disclaimer Argus Research is an independent investment research provider and is not a member of the FINRA or the SIPC. Argus Research is not a registered broker dealer and does not have investment banking operations. The Argus trademark, service mark and logo are the intellectual property of Argus Group Inc. The information contained in this research report is produced and copyrighted by Argus, and any unauthorized use, duplication, redistribution or disclosure is prohibited by law and can result in prosecution. The content of this report may be derived from Argus research reports, notes, or analyses. The opinions and information contained herein have been obtained or derived from sources believed to be reliable, but Argus makes no representation as to their timeliness, accuracy or completeness or for their fitness for any particular purpose. This report is not an offer to sell or a solicitation of an offer to buy any security. The information and material presented in this report are for general information only and do not specifically address individual investment objectives, financial situations or the particular needs of any specific person who may receive this report. Investing in any security or investment strategies discussed may not be suitable for you and it is recommended that you consult an independent investment advisor. Nothing in this report constitutes individual investment, legal or tax advice. Argus may issue or may have issued other reports that are inconsistent with or may reach different conclusions than those represented in this report, and all opinions are reflective of judgments made on the original date of publication. Argus is under no obligation to ensure that other reports are brought to the attention of any recipient of this report. Argus shall accept no liability for any loss arising from the use of this report, nor shall Argus treat all recipients of this report as customers simply by virtue of their receipt of this material. Investments involve risk and an investor may incur either profits or losses. Past performance should not be taken as an indication or guarantee of future performance. Argus has provided independent research since Argus officers, employees, agents and/or affiliates may have positions in stocks discussed in this report. No Argus officers, employees, agents and/or affiliates may serve as officers or directors of covered companies, or may own more than one percent of a covered company s stock. Morningstar Disclaimer 2016 Morningstar, Inc. All Rights Reserved. Certain financial information included in this report: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.