NewsWire--JANUARY 23, 1996
TOPIC: Financial Statements, Stock Valuation,
and Agency Costs
SOURCE: "Falling Profit Marks End
of Era at Wal-Mart," by Kevin Helliker and Bob Ortega, Wall
Street Journal, January 18, 1996, B1.
SYNOPSIS: Wal-Mart came very close to joining
a select group of firms to report 100 quarters of consecutive
earnings growth. However, sluggish sales in the entire retail
sector and severe weather conditions in early January have led
the firm to estimate a decline in fourth quarter EPS. The article
illustrates the strong cause and effect relationship between a
decline in the earnings growth rate and a decline in stock price.
This sensitivity of prices to growth is underscored by the fact
that Wal-Mart's quarterly EPS is expected to be between $0.40
and $0.42 per share, 4 to 6 cents below analysts' estimates. In
fact, the firm's annual EPS is expected to rise materially. Finally,
the article discusses Wal-Mart's use of stock incentives for all
employees and the effect of the stock's sluggish performance on
the effectiveness of this method of compensation.
DISCUSSION QUESTIONS:
1. What is "Earnings per Share," or EPS? What
are the reasons for Wal-Mart's inability to continue their long
history of EPS growth in the quarter about to conclude? Why might
a casual reader of the graphs in the article assume that the situation
is more dire than it really is?
2. How does Wal-Mart compensate its employees? Discuss
the pros and cons of this compensation strategy.
3. If we view the value of Wal-Mart common stock as the
present value of future dividends, explain how this news is likely
to influence stock value. As a specific example, consider a stock
where investors require an 18% return on their investment. If
the current dividend is $0.20 per share but is expected to grow
by 17% next year and by the same rate for the long term, use the
constant growth model to determine value. Recompute this value
if the growth rate is reduced to 16.5%. (Note: Similar to this
example, Wal-Mart is a low-dividend, high-growth stock.)
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