Wal-Mart: Stagnant since 1999

[troycochrane]

The class that I TA watched a documentary titled "Is Wal-Mart Good for America?" In order to present a different perspective on some of the issues covered in class I decided to quickly show them a graph of Wal-Mart's valuation/growth compared to Exxon and the S&P 500. The chart below is what I found. All three series are indexed, based on the adjusted share price from Yahoo! Finance. The right-hand axis is in logarithmic scale. The picture is one of growth. Wal-Mart's growth has drastically exceeded that of Exxon, but it was starting from much, much smaller. If the series were to show actual market values, Exxon would remain bigger (approx. $300 billion market cap for Exxon, to $200 billion for Wal-Mart). In effect, what the series show is what would have become of $100 invested in any of the three options in August of 1972. That hundred dollars, in a diversified portfolio made up of the S&P 500 would, in November, 2009, be worth $983.51 (0.7% growth per month). Invested in Exxon, it would be worth $17,826.19 (1.2% growth per month). If you'd had the foresight at the time of Wal-Mart's IPO to put that hundred dollars in the upstart 'general store', you would have enjoyed 1.9% growth per month: $136,575.

None of this is likely too surprising. What was surprising for me is the relative stagnation since 1999. First, let's recall that this is logarithmic scale, so although Wal-Mart's valuation looks quite flat since 1999, it is has fluctuated a great deal. However, it has not managed to break through what appears to be an accumulatory ceiling. This, despite the normalization of trade relations between the US and China. This was significant as after this normalization the US's trade deficit with China really took off. And, Wal-Mart is supposedly the exemplary beneficiary of this change.

As Sean said when I showed him the graph, "This is a story that needs to be told." What do others think is going on here? The only thing that immediately comes to my mind is that Wal-Mart's gains from the opening up of China were completely captured in expected earnings in 1999. China was already an increasingly significant trading partner through the 90s. It was only after the awarding of permanent normalized trade relations that Chinese imports, relative to US GDP crossed the 1% mark. However, the growth trend was already underway. It would appear that the establishment of normalized trade relations was, for the market, already a foregone conclusion, political grandstanding, notwithstanding.[1]

A comparison of valuation and actual earnings would be informative, but will have to wait as earnings statistics are not as easily accessed as adjusted share price.


[1] These claims based on data from Foreign Trade Statistics, US Census Bureau: http://www.census.gov/foreign-trade/balance/country.zip [link will download a zip file].

[joefrancis]

Hi Troy,

This is interesting. One question: Do you know how much of Wal-Mart's supplies come from China?

I ask because I've done some Google searches and the results are a bit confusing. I found a 2005 Fortune report that says "Wal-Mart buys only about 10% of what it sells in U.S. stores from suppliers in China", but also a 2004 China Daily report that states "So far, more than 70 per cent of the commodities sold in Wal-Mart are made in China." Obviously there is something of discrepancy between the two figures............

Doing some back of the envelope calculations, I would say that the 10% figure is nearer the mark. According to an Economic Policy Institute report, in 2006 Wal-Mart imported US$27 billion from China. According to Wal-Mart's annual report, it had 'costs of sales' of US$240 billion in the same year. Both of these figures require further investigation... but 27/240 does equal 11%... It may be, therefore, that Wal-Mart is less dependent upon China than it seems...

J

p.s. Be careful about looking at that annual report - it is quite horrific: Wal-Mart = shiny happy people!

[joefrancis]

p.p.s. Another observation: the rapid increase in Wal-Mart's share price in the late 1990s up to normalisation with China could have been in expectation of the conclusion of negotiations, thus "the opening up of China [had been] completely captured in expected earnings in 1999", as you suggest...

[troycochrane]

Hi Joe,
I think the cost of sales figure understates the importance of Chinese imports for Wal-Mart's sales. Wal-Mart's profits are made on the mark-up on those imports. They could actually cut the cost of those imports, making them look like a less important part of their sales. Yet, that's obviously not the case. I wonder if the Fortune article is basing it's figure on the share of the cost of the items, rather than on the quantity of items. My guess is that that quantity of items is larger and that the mark-up is higher.

[egeorge]

troy man youre an encyclopedia

[joefrancis]

Four things:

(1) I agree with Eric.

(2) After googling a bit more, I think that figure of 10% seems so low because it doesn't include all the junk/goods that Wal-Mart buys from suppliers in the the US that have actually been made in China. E.g. Black & Decker drills bought from Black & Decker USA that were actually made in China.

(3) Your mark-up point is interesting. It would be good if we could think of a way to demonstrate it empirically.

(4) Something about the presentation of data. In your chart, as you suggest, it looks like Wal-Mart has been stagnant since 1999. However, if you think about it in differential terms, it looks quite different, since the S&P500 was even more stagnant. For instance, the chart below shows the same series only in more differential terms: Wal-Mart's share price index/S&P500 index, with Sept 1972 as 100.

Wal-Mart_differential_share_price.png (36.29 KiB) Viewed 1706 times

This gives quite a different perspective on Wal-Mart's performance. Four distinct periods have been identified: (1) 1972-77, during which not much happened; (2) 1977-82, a golden age of very rapid differential growth; (3) 1982-92, a slightly less golden age, but still rapid growth; and (4) 1992-present, during which the general trend is upwards, although at a slower rate and with periods in which Wal-Mart's share price fails to beat the average. This is, then, quite a different picture. Moreover, in this picture 1999 doesn't appear as a significant year at all...

...but then comes the importance of also presenting the data as you did originally, because 1999 obviously was an important year...

...but then looking at the data in differential terms changes the question, from 'Why did Wal-Mart stagnate after 1999 despite China's liberalisation?', to 'Why didn't Wal-Mart stagnate as much as the average after 1999? Was it because of China's liberalisation?' That's quite a different question!

[troycochrane]

Joe:
Your differential presentation is important, and certainly in keeping with the CasP tools. One of the problems is with the make-up of the S&P500, which is not necessarily representative of the market as a whole. I know we all use it a proxy, but I think more consideration needs to be given to it's specific make-up.

For one of my assignments I constructed a WRDS500, which is more comprehensive than the S&P500 or the Fortune 500[1]. I have constructed a ratio of the market capitalization of Wal-Mart to that of the average for the WRDS500. This is the differential power of capital ratio and the numbers themselves have more meaning than the indexes. The picture from 1999 becomes even more acute: serious decline. There are also four periods (the series begins in 1980, when Wal-Mart entered the WRDS500). On the graph, I noted the annualized growth rates for the four periods.

WMT-WRDS500.jpg (107.87 KiB) Viewed 1701 times

[1] WRDS=Wharton Research Data Service. The 500 firms are based solely on market capitalisation (debt plus equity plus retained earnings). In this case, the comparison is with US firms. If we used global firms (which would only include those listed on US stock exchanges) the line shifts downward, but doesn't change any of the inflection points.

[troycochrane]

My guess is that the S&P500 data gives us a rough enough picture that we can surmise an increase for 2008 in the WMT/WRDS500 series.

If you use a linear scale on the vertical axis, you see much more of a decline in the recent years, but it still appears to begin in 2003, with 1999 seeming much more insignificant. It also loses the dramatic growth in the later part of the 1970s. A natural log scale might be a nice compromise.

[joefrancis]

Troy,

The graph is interesting, and you may well have a point about the S&P500. Nevertheless, I do have one major question: Why have you used that formula to calculate market capitalisation?

As I understand it, market capitalisation is:

share price * number of shares outstanding

But you seem to have used the following formula:

debt + equity + retained earnings

I'd be curious to know what your rationale is here....

I'm particularly doubtful about this because there was a basic opposition between debt and equity in the United States during the twentieth century. The conflation of the two therefore seems quite problematic.

By the way, if you take the conventional definition of market capitalisation (share price * no of shares), a quite different picture emerges. Indeed, it is basically the same as the differential price chart I posted above:

wal_mart.png (58.98 KiB) Viewed 1701 times

(Wal-Mart market capitalisation calculated data from Compustat; S&P500 data calculated from Standard and Poor's; price indices for both are calculated from Yahoo! Finance.)

Apologies for being a pain in the ass on this one. Joe

[joefrancis]

Actually, looking at the two graphs again, the pattern is more or less the same, except your WRDS500 graph peaks in 1999, whereas my S&P500 graph peaks in 2002. In both graphs, however, the rapid decline is during 2003-2007. Crucially for the overall interpretation, your graph doesn't show the pick-up for Wal-Mart in 2008....

That said, I'd still be curious to know the rationale behind your formula for market capitalisation...

The apologies still apply.