Consider the following excerpt from a Prudential report on Wal-Mart, dated May 13, 2003. The report states:
Question:
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 stock’s current valuation of 28 times our 2003 EPS estimate of $2.01 adequately reflects the company’s 13% 5-year EPS growth rate . . . Wal-Mart is currently trading at 28.2 times our 2003 EPS estimate of $2.01, a 57% premium to S&P 500. This is not far from the retailer’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 the market multiple or 27.9 times. Using this valuation and our 2003 EPS estimate of $2.01 yields a 12-month price target of $56, up from $55. Discuss the merits of the valuation technique mentioned in this excerpt, with reference to the contents of the chapter.
Step by Step Answer:
Behavioral Corporate Finance Concepts And Cases For Teaching Behavioral Finance
ISBN: 9781259277207
2nd Edition
Authors: Hersh Shefrin