Consider the following excerpt from a prudential report on Wal-Mart, dated May 13, 2003. The report states:
We are maintaining our Hold rating on Wal-Mart as we believe the stockâ??s current valuation of 28 times our 2003 EPS estimate of $2.01 adequately reflects the company 13% 5- year EPS growth rate...Wal-Mart is currently trading at 28.2 times our2033 estimate of $2.01,a 57% premium to S&P 500. This is not far from the retailerâ??s five-year average high premium of 59%. The stock is also close to its 52-week high of $59.30, achieved in May 2002.
It is difficult for us to envision investors paying an even larger premium, particularly for 13% projected growth. We believe the stock will continue to hover around a 55% premium to market multiple or 27.9 times. Using this valuation and our 2003 EPS estimate of $2.01 yields 12-month price targets of $56, up from $55.
Discuss the merits of the valuation technique mentioned in this expert, with reference to the contents of the chapter. Base your discussion on the following questions.
- Is using a heuristic necessarily wrong in respect to valuation?
- Do you think eBay is an anomalous case, and are there situations where the use of heuristics makes sense?
- Is valuation part science and part art?
- What advice would you give financial managers when it comes to valuing their firms?