reliable financial stock portfolio analysis (1)

Reliable Financial Stock Portfolio

Reliable Financial

Stock Portfolio Analysis

Prepared for: Client

Prepared by: Murtaza Maqbool AhmedDate: April 12th, 2015

Enjoy the fruits, leave the planting to your reliable partners!

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Hello Client,

Thank you for choosing Reliable Financial for your investment needs. To help you understand the performance of your portfolio better, in the observed period starting from January 15th, 2015 to April 1st, 2015, I have created this Stock Portfolio Analysis report. This contents of this report include the overall performance of your portfolio, description of major events in the North American markets and fundamental analysis of the best and worst performing stocks in the portfolio.

A total gain of 4.1% was achieved on the portfolio during the observed period. The S&P 500 Index return was 3.36%, while the S&P/TSX Composite Index return was 6.42%. The best stock of the portfolio was Suncor Energy Inc. while the worst stock was Wal-Mart Stores Inc. Toyota Motor Corporation provided high returns throughout the observed period and gave a total gain of 9.11%. McDonald’s performance was slightly better than the overall market, despite many operational issues, and it gave a total return of 5.07%. Abbott Labs traded at $45.89 at close on April 1st, 2015 and provided a total gain of 3.94%. Abbott also declared a quarterly dividend of $0.24/share. Total dividends received during the observed period were $299.3 and CAD 164.2. Abbott’s dividend of $180.55 will be received on May 15th, 2015.

Both Canadian and American stock markets suffered due to low oil prices. Canada’s oil-heavy economy is due to lose CAD 7.6 billion as a result. Bank of Canada reduced its overnight interest rate, which provided good results for the financial sector. With crude oil selling as low as $47.38 in mid-January, the whole market felt its negative effects. In late January, forecast for a dangerous snowstorm dipped the market by 55 points. The market reached its record high of 2100 points in mid-February. The March jobs report suggested shortage of skilled labor, which has resulted in big retailers like Wal-Mart and McDonald’s increasing wages to keep their trained staff. A stronger dollar and uncertainty about Fed’s interest rate hike are likely to cause problems in the future.

The best stock of the portfolio, Suncor Energy (TSX: SU.TO) was found to be overvalued in the fundamental analysis. The high estimate price of CAD 32.51 is lower than the April 1st, 2015 price of CAD 37.25. OPEC’s record pumping of oil has meant that Suncor’s earnings are unlikely to grow in the future. Suncor’s best case scenario includes pipeline projects like Keystone, East Energy and Northern Gateway BC to be approved. The recommendation will be “Sell” for Suncor. The worst stock of the portfolio, Wal-Mart Stores Inc. (NYSE: WMT) was found to be undervalued in the fundamental analysis. The low estimate price of $80.85 is higher than the last observed price of $80.69. A relative P/E ratio approach was used to find the intrinsic value of Wal-Mart’s stock. With 40 new Canadian stores, out of which 11 are already functioning, Wal-Mart can have a high EPS growth. Unfavorable foreign exchange rates, improvement of overall customer experience and lawsuit by New

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York’s Trinity Church are Wal-Mart’s biggest challenges in the coming days. The recommendation will be “Buy” for Wal-Mart.

Thank you and have a great day!

Murtaza M Ahmed.

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Table of ContentsDescription of Portfolio’s Performance...................................................................................4

Best and Worst Stocks.........................................................................................................4

Rest of the Portfolio.............................................................................................................4

Description of Major Events in American and Canadian Stock Markets................................5

American Stock Markets.....................................................................................................5

Canadian Stock Markets.....................................................................................................5

Fundamental Analysis of Best Stock: Suncor Energy Inc.......................................................6

Introduction.........................................................................................................................6

Analysis...............................................................................................................................6

Fundamental Analysis of Worst Stock: Wal-Mart Stores Inc..............................................8

Introduction.........................................................................................................................8

Analysis...............................................................................................................................8

Bibliography.........................................................................................................................10

Appendix A- Suncor’s P/E Ratio............................................................................................12

Appendix B- Wal-Mart’s P/E Ratio........................................................................................13

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Description of Portfolio’s PerformanceThe performance of the portfolio was largely satisfactory compared to the overall performance of the market. Total gain for all the stocks in the portfolio listed on NYSE was 2.04%, while the S&P 500 index improved by 3.36% during the 76 day period starting from January 15th, 2015 to April 1st, 2015 (Yahoo Finance, 2015). The only stock listed on the Toronto Stock Exchange, Suncor Energy Inc., outperformed the market by more than 3%. The total gain on SU.TO was 9.69%, while the S&P/TSX Composite Index increased by

6.42% only (Yahoo Finance, 2015). The overall gain on the portfolio was 4.01%.

Company CostCurrent

PriceHigh Price Low

Price Gain %Market Gain

%Wal-Mart Stores Inc.

(NYSE: WMT) $87.50 $80.71 $89.93 $80.69 -7.76%

3.36%

McDonald's Corp. (NYSE: MCD) 91.64 96.29 100.25 88.02 5.07%

Toyota Motor Corporation (NYSE:TM)

126.92 138.48 145.32 126.92 9.11%

Abbott Laboratories (NYSE: ABT) 44.15 45.89 47.83 43.41 3.94%

Suncor Energy Inc. (TSX: SU.TO)

CAD 33.96

CAD 37.25

CAD 39.25

CAD 33.96 9.69% 6.42%

Reliable Financial Portfolio 4.01%

Best and Worst StocksWMT was the worst stock of the portfolio, currently traded at $80.71. Total loss on its stock was 7.76% and $1552 (FINVIZ, 2015). A dividend of $0.49/share was received on March 11th, accounting for $114 (Yahoo Finance, 2015). The best stock of the portfolio was SU.TO, the Calgary-based oil giant. Despite the uncertainty in its market and OPEC not supporting oil prices, Suncor’s stock never dropped from its initial cost price of CAD 33.96. A dividend of $0.28/share was paid on March 25th, 2015 which accounted for CAD 164.2 (Yahoo Finance, 2015).

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Table 1- Portfolio Performance

Sources: (Yahoo Finance, 2015), (FINVIZ, 2015)


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Rest of the PortfolioToyota Motor Corporation’s stock fared great results since we purchased it, having traded as high as $145.32 on March 23rd, 2015 and providing a 9.11% gain (FINVIZ, 2015). The demand of Toyota’s SUVs is expected to rise significantly in the US this year (Dalavagas, 2015). Rising dollar prices have not affected Toyota a lot due to its low exposure to US dollar compared to Ford and GM. McDonald’s Corp. faced some troubles with its suppliers in China and recorded poor sales in Q4 of 2014. With the change in top management, investors seem optimistic for a better 2015 (Spencer, 2015). A dividend of $0.85/share was received on March 11th,

accounting for $185.3. Abbott Laboratories sold its Markets specialty and Branded generics business to Mylan Inc. for $5300 million on March 3rd, 2015 (Company News, 2015). Abbott’s stock traded as high as $47.83 and is currently traded at $45.89.

Description of Major Events in American and Canadian Stock MarketsAmerican Stock Markets7 out of 10 industries in the S&P 500 index saw a decline in the week ending on January 17th, 2015, as the index dropped by 1.2% (Lu Wang, 2015). The drop in oil prices impacted the overall market bitterly, with crude oil selling as low as $47.38 in mid-January. As oil prices started stabilizing around early-February, investors showed interest in energy stocks like Exxon, Suncor and Chevron. The east coast prepared itself for a lethal blizzard. Luckily, no tragedies happened other than 5.5 centimeters of snow in New York and surrounding areas. The markets reacted to the anticipated snowstorm and the S&P 500 index dropped by 55 points in 2 days starting January 28 (Yahoo Finance, 2015). The news of the Greek debt impasse easing, along with the improving oil prices erased earlier declines, as market reached its record high on February 17 (Bost, 2015) of 2100 points. As companies declared their Q4 earnings in mid-February and early-March, investors showed more interest in the better-earning companies. Overall, an increase of 4.2% in earnings was witnessed. A spike of 7.8% in new home sales was observed, the highest since the 2008 financial crisis (Lehiff, 2015). The stronger dollar impacted the exports as well as domestic production sector, which was evident by the March jobs report. Big challenges due to currency rates are expected to line up for all companies which have a high exposure to international currencies, like P&G and Wal-Mart.

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Figure 1- S&P 500 3-Month Price Chart

Source: Yahoo Finance, April 2nd, 2015


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Canadian Stock MarketsCanada’s economy faced a bigger dent due to the low oil-prices. The S&P/TSX Composite Index went as low as 14,041 points on January 15th, 2015. Bank of Canada reduced its overnight interest rate to ease the impact of lower oil prices on January 21st, 2015 and the market return improved immediately (Tilak, 2015). TD, RBC and the overall financial sector, which impacts the market index the most, showed signs of improvement in early February as the market reached its two months high (Yahoo Finance, 2015). As TransCanada beat market expectations in Q4 of 2014, confidence spurred in the energy sector with SU.TO hitting CAD 38.80 in late February. Hudson Bay’s involvement in the real estate market spiked the market index by 63.80 points on February 23rd (Sharp, 2015). Strong US dollar did not impact the resource-heavy S&P/TSX Composite Index a lot. But, the oil- heavy economy is nearly stripped off by CAD 7.6 billion due to low oil prices.

Fundamental Analysis of Best Stock: Suncor Energy Inc.IntroductionCalgary-based Suncor Energy Inc. was the best stock of the portfolio, which experienced total gains of 9.69% (Yahoo Finance, 2015). 587 shares of this stock were bought for the portfolio at a cost of CAD 33.96/share. It traded at CAD 37.25 at close on April 1st, 2015 (Google Finance, 2015). The lowest price observed for SU.TO was its cost price while it traded as high as CAD 39.25 during the last 3 months (YahooFinance, 2015). A quarterly dividend on CAD 0.28 was declared per share on February 4th, 2015 (www.suncor.com, 2015).

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Figure 2- S&P/TSX Composite Index 3-Month Price Chart

Source: Yahoo Finance, April 2nd, 2015

Figure 3- Suncor’s 3-Month Price Chart

Source: Yahoo Finance, April 12, 2015


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AnalysisA P/E ratio approach was used to find if Suncor’s stock is undervalued or overvalued at CAD 37.25. The CAPM model was used to find the required rate of return for this security while the dividend discount model was incorporated to find the justified P/E ratio for Suncor.

The required rate of return for Suncor, using the CAPM model was found to be 13.23%, the calculation for which can be found in Appendix A. Considering that the Petroleum integrated company is a slightly risky security, its beta was found to be 1.3 (FINVIZ, 2015). A 10 year Canadian bond yield was considered to be the risk-free rate, as the time frame for T-bills and 30 year bonds are too short and too long respectively. This risk-free rate was 1.32% (Bloomberg, 2015). The market return was found to be 10.48% by taking an average return for S&P/TSX Composite Index for the past 50 years (Shiller, 2015).

By using the data in Appendix A, Suncor’s sustainable growth rate was found to be 6.42%. An estimated EPS of CAD 1.96 was determined by multiplying the 2014 EPS value to the growth rate.

During the observed period, oil prices continued to stay low (Lu Wang, 2015). This did not help Suncor or any other company in the Oil and gas sector. Exxon Mobil and Chevron Corporation have posted record lows since the 2008 correction (Value Line Survey, 2015). But, there were a few positives for Suncor. On February 9th, 2015, Enbridge’s 9B pipeline running from “North Westover to Montreal” was approved by the National Energy Board (Enbridge, 2015). This should give an EPS growth increase of 3% to Suncor. Considering political and regulatory factors, Suncor is expected to have a few good years in the future. The American Presidential elections to be held in 2016 would mean that Barack Obama, who is not fond of the Keystone pipeline, will no longer be in the office. The Republicans are in majority in the Congress, and have already approved the Keystone pipeline (News, 2015). The new President will likely not lock horns with the Congress and Keystone should be approved, which will result in an EPS increase of 2% for Suncor. As Canada lines up for elections in 2015, the newly-elect government will adopt drastic measures to improve the economy and reduce budget deficit. This could result in some progress regarding pipelines such as Energy East and Northern Gateway BC, which will result in an EPS increase of 1% for Suncor. Although, cost cutting does not suggest long-term progress, in recent times, only Suncor has been able to do it in the best possible way in the industry (Seidman, 2015). On January 13th, 2015, Suncor announced that it will cut CAD 1 billion from its annual budget to reduce it to CAD 6.2 billion only. On April 1st, 2015, Suncor announced that it is in line to realize CAD 600 million to CAD 800 million in cost-cutting. Steve Williams, Suncor’s CEO said, "We will continue to focus on reliable, safe and environmentally responsible operations and delivering value to shareholders." (www.suncor.com, 2015). This should increase their EPS growth by 0.05%, resulting in a high estimate of 12.47% or EPS of CAD 2.2.

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On the contrary, it can be argued that all of Suncor’s eggs are in the pipeline basket. If plans for Keystone, East Energy and Northern Gateway BC do not materialize, then Suncor could see a decrease in EPS growth by 3%. Especially, after the oil-spill in Vancouver’s English Bay on April 9th, 2015 (News 1130, 2015), authorities will be more strict than ever when it comes to pipelines. Saudi Arabia and OPEC have continued to produce oil at an all-time high rate, to re-gain their market share from the US shale drillers (Customs Today, 2015). This means that prices will continue to stay low, which would result in a decrease in EPS growth by 3%. Suncor has stopped investing in most of its new capital expansions, which means that production is unlikely to grow. The will reduce EPS growth by 0.42%, resulting in in a low estimate of 0% or EPS of CAD 1.84.

The average dividend payout ratio over the past five years has been 25.51%. Suncor’s dividends have grown significantly in the recent past, which is in line with company’s vision. The average dividend growth rate over the past five years has been 28.50%. Suncor’s expected payout ratio should be 30%, considering that its dividend has grown consistently over the past 10 years (Seidman, 2015). With OPEC’s record high oil production, the required rate of return should be adjusted to 14.50% from 13.23%.

YEAR EPS DIVIDENDS PAYOUT RATIO2010 CAD 1.71 CAD 0.4 23.39%2011 2.67 0.43 16.10%2012 1.79 0.5 27.93%2013 2.6 0.73 28.08%2014 1.84 1.02 55.43%

Average Payout Ratio 25.51%Model Price (Price = Justified P/E ratio x Estimated EPS)

Low Estimate High EstimateJustified P/E 2.07 14.78

Estimated EPS CAD 1.84 CAD 2.2Price CAD 3.81 CAD 32.51

Source: Value Line Survey: January 29, 2015

The high estimate for justified P/E ratio will be 14.78, while the low estimate for justified P/E ratio will give 2.07. This will result in a high price estimate of CAD 32.51, while a low price estimate of CAD 3.81, which suggests that Suncor’s stock is overpriced at CAD 37.25 and gives a “Sell” signal.

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Table 2- Suncor’s Payout Ratio and Model Price


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Fundamental Analysis of Worst Stock: Wal-Mart Stores Inc. IntroductionArkansas-based retail giant Wal-Mart Stores Inc. experienced total loss of 7.76% during the observed period. 229 shares of this stock were bought for the portfolio at a cost of $87.5/share (FINVIZ, 2015). It traded at $80.71 at close on April 1st, 2015. The lowest price observed for WMT was $80.69 while it traded as high as $89.93 during the last 3 months (Yahoo Finance, 2015). An annual dividend on $1.96 was declared per share on March 10th, 2015 (www.walmart.com, 2015).

AnalysisThe P/E ratio approach was used to find if Wal-Mart’s stock was undervalued or overvalued. To estimate a justified P/E ratio for Wal-Mart, its growth opportunities were analyzed and current P/E ratios of comparable companies were taken into consideration to determine if the current P/E truly represents Wal-Mart’s value. The following chart depicts the current P/E ratios of Wal-Mart, the Retail Store Industry, the market index; S&P 500 and two comparable companies, Costco and Macy’s Inc. Although, Target is the third biggest company in the industry, it was not considered for the analysis because of its recent financial bump, which will provide uninformative results.

P/EWal-Mart Stores Inc. 16.17

Costco Wholesale 27.5Macy’s Inc. 13.9

Retail Stores Industry 25.4S&P 500

19.44

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Figure 4- Wal-Mart’s 3-Month Price Chart

Source: Yahoo Finance, April 9, 2015

Sources: (Yahoo Finance, 2015), (The Street, 2015), (Value Line Survey, 2015)

Table 3- P/E Values of WMT, Competition and Market


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The EPS growth of Wal-Mart in each of the last five years has been lower than both Costco Wholesale and Macy’s, which can be found in Appendix B. As Costco’s P/E ratio is very close to the industry’s P/E ratio, Costco’s growth rate of 12.72% is a good guess for the industry. Considering that Wal-Mart’s average EPS growth rate is 6.58% (Spencer, 2015) which is only 52% of Costco’s EPS growth rate, and Wal-Mart’s P/E is nearly 0.63 times the industry ratio, a slightly lower P/E ratio of 15.0 will be a better starting point for the analysis.

Wal-Mart has been in the news over the observed period for wage-increase in many states in the US, cost-cutting measures, opening of new Canadian stores and Target’s exit from Canada, which could be associated to Wal-Mart’s aggressive low pricing. On February 11th, 2015, Wal-Mart Canada announced that it will open 29 supercenters and invest approximately CAD 340 million for “supercenter, distribution network, and e-commerce projects” (Pelletier, 2015). This is in addition to the 11 supercenters it already opened in January, 2015. This will result in an increase of 1.0 to the P/E, considering that it will increase Wal-Mart’s share in the Canadian market and further stamp its authority as the biggest retailer in the world. Since Greg Foran became the CEO of Wal-Mart USA, which accounts for 60% of Wal-Mart’s sales, a lot of emphasis has been given on improving customer experience and regaining Wal-Mart’s position as the lowest-price leader (D'Innocenzio, 2015). This should improve the P/E by 0.2. Although, increasing wages will cost Wal-Mart a little bit, it will also mean that they will be able to retain their trained staff in a highly competitive labor market, which is evident from the jobs report (Business Wire, 2015). This should result in a 0.1 increase in P/E. The resulting high P/E would be 16.3.

On the contrary, Wal-Mart’s profits have been affected adversely because of unfavorable foreign exchange rates. This will cause a decrease of 0.1 to its P/E. 25% of Wal-Mart’s stores are in the oil-producing states in the US. With tremendous amount of layoffs in those states, people will likely not turn up to the stores for unnecessary products (CNBC, 2015), which would have an adverse effect to their P/E of about 0.1. A lawsuit filed by New York’s Trinity church could affect Wal-Mart’s sales of firearms (Geier, 2015), which could affect P/E by another 0.1. The resulting low P/E would be 14.7

Using the data in Appendix B to calculate Wal-Mart’s sustainable growth rate, an estimated EPS of $5.77 was determined by multiplying the 2014 EPS value to the growth rate.

If the new Canadian stores start generating profits, Wal-Mart could see an increase in EPS by $0.5. Also, the new stores opened under Wal-Mart’s and Sam’s Club’s banners in Arkansas, Alabama, Tennessee, Virginia, Utah, Wisconsin, Illinois, Arizona and Texas could result in increased EPS of $0.35 (Value Line Survey, 2015). Improved inventory-keeping mechanisms and better customer experience could result in $0.03 increase in EPS (Pelletier, 2015). A high estimate for EPS can be expected to be around $6.65.

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On the other hand, start-up costs for the new Canadian stores could affect Wal-Mart’s profits. Therefore, an EPS decrease of $0.15 could be expected. Unfavorable foreign exchange rates could result in an EPS decrease of $0.05. Wal-Mart has decided to spend $1 billion to increase wages in 2015. This should hardly upset the company that posted $485.7 billion in revenue for 2014. An EPS decrease of $0.02 can be expected. The retailer sells firearms in less than 50% of its stores in the US which could result in an EPS decrease of

$0.05. This low EPS could be then estimated around $5.5.

Model Price (Price = Justified P/E ratio x Estimated EPS)Low Estimate High Estimate

Justified P/E 14.7 16.3Estimated EPS $5.5 $6.65

Price $80.85 $108.4

A high estimate for Wal-Mart’s price was found to be $108.4, by multiplying the high estimates for EPS and P/E ratio. Whereas, a low estimate for Wal-Mart’s stock price was found to be $80.85. The range is quite large, but it incorporates all positive and negative impacts WMT could experience in the future. A current price of $80.71 tells that WMT is still undervalued and indicates a “Buy” signal.

Bibliography(2015). Retrieved from www.walmart.com.

(2015). Retrieved from www.suncor.com.

(2015, April 1). Retrieved from FINVIZ.

(2015). Retrieved from Yahoo Finance: https://ca.finance.yahoo.com/q/hp?s=WMT

(2015). Retrieved from Business Wire: http://www.businesswire.com/news/home/20150219005629/en/Walmart-announces-Q4-underlying1-EPS-1.61-additional#.VSsBo_lDt8E

(2015). Retrieved from Google Finance.

(2015). Retrieved from The Motley Fool.

(2015). Retrieved from Value Line Survey.

(2015). Retrieved from The Street.

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Table 4- Wal-Mart’s Model Price


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(2015). Retrieved from Bloomberg: http://www.bloomberg.com/markets/rates-bonds/

(2015). Retrieved from Enbridge: http://www.enbridge.com/ECRAI/Line9BReversalProject.aspx

(2015, April 9). Retrieved from News 1130: http://www.news1130.com/2015/04/09/oil-spill-at-english-bay/

(2015, April 13). Retrieved from Customs Today: http://customstoday.com.pk/saudi-arabia-produces-10-3m-bpd-oil-in-march/

Bost, C. (2015, February 17). S&P 500 Just Broke 2,100 for the First Time. Retrieved from Bloomberg: http://www.bloomberg.com/news/articles/2015-02-17/u-s-index-futures-drop-on-greek-deadlock-with-s-p-500-at-record

CNBC. (2015). Retailers feeling oil squeeze. Retrieved from Yahoo Finance.

Company News. (2015, March 2). Retrieved from Value Line: https://research.valueline.com/secure/research#list=recent&sec=company&sym=abt

Dalavagas, I. (2015, February 21). Value Line Research. Retrieved from Value Line.

D'Innocenzio, A. (2015, April 1). Wal-Mart asks suppliers to cut back on ads for store as it seeks low-price leader crown again. Retrieved from Yahoo Finance: https://ca.finance.yahoo.com/news/wal-mart-asks-suppliers-cut-back-ads-store-164729942.html

Geier, B. (2015, March 23). http://fortune.com/2015/03/23/wal-mart-guns/?xid=yahoo_fortune. Retrieved from Fortune.

Industry Browser - Basic Materials Sector - Industry List. (2015). Retrieved from Yahoo Finance: https://biz.yahoo.com/p/1peeu.html

Lehiff, K. A. (2015, March 24). Stocks Climb, Nasdaq Leads Markets as Health Care Rebounds. Retrieved from The Street: http://www.thestreet.com/story/13088816/1/stocks-are-mixed-as-us-consumer-inflation-moves-higher.html?puc=yahoo&cm_ven=YAHOO

Lu Wang, O. R. (2015, January 15). Friday Rally Masks S&P 500 Pain as 10% Corrections Spread. Retrieved from Bloomberg: http://www.bloomberg.com/news/articles/2015-01-16/friday-rally-masks-s-p-500-pain-as-10-corrections-spread?cmpid=yhoo

McKenna. (2013). McDonald's Annual Report. Retrieved from About McDonald's.

McMillon, H. J. (2014). Wal-Mart Annual Reprt. Retrieved from Wal-Mart.

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News, C. (2015, February 11). Keystone XL approved by Congress, faces president's veto. Retrieved from CBC: http://www.cbc.ca/news/business/keystone-xl-approved-by-congress-faces-president-s-veto-1.2953990

Pelletier, A. (2015, February 11). Walmart Canada announces expansion plans; Retailer continues to accelerate food and e-commerce growth. Retrieved from News Wire: http://www.newswire.ca/en/story/1485041/walmart-canada-announces-expansion-plans-retailer-continues-to-accelerate-food-and-e-commerce-growth

Seidman, O. (2015, March 6). Value Line Survey. Retrieved from Value Line.

Sharp, T. (2015, February 24). CANADA STOCKS-TSX higher on Hudson's Bay surge, banks gain too. Retrieved from Yahoo Finance: http://finance.yahoo.com/news/canada-stocks-tsx-higher-hudsons-213145787.html

Shiller. (2015). Retrieved from Yale University: http://www.econ.yale.edu/~shiller/data.htm

Spencer, M. (2015, February 27). Value Line Research. Retrieved from Value Line.

Tilak, J. (2015, January 22). CANADA STOCKS-TSX hits 2-week high after ECB, Bank of Canada moves. Retrieved from Yahoo Finance: http://finance.yahoo.com/news/canada-stocks-tsx-hits-2-160211799.html

Appendix A- Suncor’s P/E RatioPayout Ratio

YEAR EPS DIVIDENDS PAYOUT RATIO2010 CAD 1.71 CAD 0.40 23.39%2011 2.67 0.43 16.10%2012 1.79 0.50 27.93%2013 2.6 0.73 28.08%2014 1.84 1.02 55.43%

Average Payout Ratio 25.51%Expected Dividend Payout Ratio 30%

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Return on EquityYEAR ROE2010 7.30%2011 11.20%2012 7.10%2013 9.50%2014 8.00%

Average ROE 8.62%

Sustainable Growth Rate Calculationg = ROE x (1 - payout ratio) = 6.42%

Estimated EPS CalculationEstimated EPS = 2014 EPS*g = CAD 1.96

BetaStock βI

SU.TO 1.3

Expected Market ReturnTSX Composite (1965-

2014)E (ram) (%) 10.4768%

Risk Free Rate of Return (RF)10 Year Bond Yield

Canada 1.32%

CAPM ModelWith 10 Year

Yield RF E(r_m ) βi k

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SU.TO 1.32% 10.48% 1.3 13.23%

Adjusted Required Rate of Return = 14.50%

Current Price and P/ESuncor Industry Market

Current Price CAD 37.25Current P/E 22.4 12.8 19.1Current EPS CAD 1.84Average EPS Growth (2010-2014) 26.96%

Model Price (Price = Justified P/E x Estimated EPS)Low Estimate High Estimate

Justified P/E 2.07 14.78Estimated EPS $1.84 $2.20Price $3.81 $32.51

Appendix B- Wal-Mart’s P/E RatioPayout Ratio

YEAR EPS DIVIDENDS PAYOUT RATIO2010 $4.07 $1.21 29.70%2011 4.45 1.46 32.80%2012 5.02 1.59 31.70%2013 5.11 1.88 36.80%2014 5 1.92 38.40%

Average Payout Ratio 27.94%

Return on EquityYEAR ROE2010 21.80%

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2011 21.80%2012 22.30%2013 21.90%2014 18.50%

Average ROE 21.26%

Sustainable Growth Rate Calculationg = ROE x (1 - payout ratio) = 15.32%

Estimated EPS CalculationEstimated EPS = 2014 EPS*g = $ 5.77

Costco Wholesale’s EPS Growth

Year EPS EPS Growth ($) EPS Growth (%)2010 $ 2.93 $ 0.36 14.0%2011 $ 3.30 $ 0.37 12.6%2012 $ 3.97 $ 0.67 20.3%2013 $ 4.49 $ 0.52 13.1%2014 $ 4.65 $ 0.16 3.6%

Average Annual EPS Growth 12.72%

Macy’s Inc. EPS Growth

Year EPS EPS Growth ($) EPS Growth (%)2010 $ 2.03 $ 0.62 44.0%2011 $ 2.88 $ 0.85 41.9%2012 $ 3.45 $ 0.57 19.8%2013 $ 4.00 $ 0.55 15.9%2014 $ 4.35 $ 0.35 8.7%


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Wal-Mart’s EPS Growth

Year EPS EPS Growth ($) EPS Growth (%)2010 $4.07 $0.41 11.2%2011 4.45 $0.38 9.3%2012 5.02 $0.57 12.8%2013 5.11 $0.09 1.8%2014 5.00 ($0.11) -2.2%


Current Price and P/EWal-Mart Industry Market

Current Price $80.71Current P/E 16.17 25.4 19.44Current EPS $5.00Average EPS Growth (2010-2014) 6.58%

Model Price (Price = Justified P/E x Estimated EPS)Low Estimate High Estimate

Justified P/E 14.7 16.3Estimated EPS $5.50 $6.65Price $80.85 $108.40

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