The Role of an Equity Analyst - Case Study Example

An equity analyst keeps all financial records of the company and manages them in order to make forecasts for the company's future and analyze the trend of the company. Therefore a person should possess strong financial, mathematical, communication, and computer skills to perform the role of an equity analyst.

As of February 2010, estimate the intrinsic value of Walmart shares.  Use all of the following methods discussed in the case:

Perpetual growth in dividends

Wal Mart is using the Dividend Discount Model to estimate the intrinsic value of the company. Wal Mart is using the Constant Growth Dividend Discount Model to estimate the intrinsic value of the company and its perpetual growth in dividends. Equity analysts are using a different method of estimating the growth of dividends. Firstly, estimate the historical dividend growth in a perpetual fashion. Secondly, future growth is estimated by equity or financial analysts on the ground of recent data.

Forecasted dividends over the next several years plus the sale of the stock in the future

Growth of dividends and sales over several years is forecasted by estimating the historical value of stocks. In its financial statements, the average increase in shares has decreased as in 2009 they were 3,939 and in 2010 3,866 while sales increased more than the decrease in stock. In 2010 the annual growth of dividends is 14.7 while the average growth till 2010 is 31.3 and all forecasts are dependent on the value of historical values of stocks.

 Three stage dividends discount model

 Wal Mart is at the maturity stage of the Three stages of dividends discount. This model calculates the present stock price by using the present value of all cash flows at the cost of equity. The Wal Mart has current earnings growth is 10.40 percent with a $ 1.09 payout ratio of $ 3.72. Therefore at maturity, its payout ratio would be 40 % of its earnings.

 Price/earnings (P/E) ratio approach

 Wal Mart price/ Earning Ratio is used to estimate the intrinsic value of the stock. The P/E multiple of Wal-Mart was 14.23 times. According to the analyst, Wal-Mart's current value depends on the heavy traffic of customers or US benefits while the risk is attached to the political, and economic condition of the country where this store is operating and wage laws. A price-earnings ratio of 1 is assumed risky while 20 expressed is good to do business in the future.

Clearly state any assumptions you make to estimate the value.

Let's assume the current market share price is 200 while the earnings per share are 13. 05 and the price-earnings ratio is 19.16 and this ratio is considered the best for the Wal Mart

Based on your analysis, what recommendation would you make as Sabrina Gupta?

Recommendations for Sabrina Gupta are stated as under:

1. Wal Mart should increase the value of their shares by increasing sales.
2. Wal Mart should train their customers to increase their communication skills and develop new ways to satisfy their customers.
3. The risk of international barriers should be decreased
4. Sales of the company will be increased to earn more market share by crossing the barriers of tariffs and laws.
5. The company should try to achieve the P/E ratio of 1: 20 which is best for Wal-Mart.