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Buffett, Berkshire and Wal Mart

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April 26, 2010 – Comments (3) | RELATED TICKERS: BRK-B , WMT

So hopefully by now everyone is aware that we have three of TMF’s finest (Philip, Joe and Andy) heading off to Omaha next week to participate in what is known to some as Woodstock for capitalists. Yes, I am talking about the annual Berkshire Hathaway meeting. Since I am going to be hanging back here at Fool HQ anxiously awaiting their dispatches, it seems like a perfect time to take a look at one of Berkshire’s key (and our Core) holdings: Wal Mart. Philip initially recommended Wal Mart in the May 2006 issue. So how is Wal Mart looking today? What qualities does Wal Mart possess that make it so attractive to Buffett? Did I leave the iron on?

Today Wal Mart is trading at just over $54 per share and the P/E is right around 14.5. Considering that over the last ten years the P/E has averaged more like 22, this could be seen as an excellent buying opportunity; I can see why Philip has it as one of our Best Buys Now. And how about WEB’s preferred metric of return on equity? Well, Wal Mart is returning on equity, and pretty consistently I must say. Over the last ten years, return on equity for the retail behemoth has averaged 21%. And what’s more, the difference between the highest and lowest measure over those ten years is only 3.1%, so it is not like they are putting up sporadic numbers; these are qualities we look for in the Core. Another point that Philip made in his original write up was that Wal Mart generates solid returns on capital and this is still the case with an average return on capital over the last ten years of almost 13.5%. As long as they can maintain that lovely low cost of capital, they should continue to create value for shareholders. While Philip’s valuation work is based on a DCF model and not multiples, the multiples can help shed some light on where the stock is trading in relation to our estimate of intrinsic value.

Let’s consider one final quality that Buffett looks for in a business. Is it simple to understand? Unless you have been hiding under a rock then you have heard of Wal Mart. And I would venture a guess that you have also been in one…more than once. Generally speaking, retail is a pretty easy business to understand. Wal Mart is just trying to sell stuff that people need at the lowest prices around. And with that mission in mind store count keeps growing and the expansion continues. Store count has grown significantly since the 2006 recommendation. According to the most recent 10K, as of January 31, 2010 total U.S. store count was 4,304 (including Sam’s Club). International operations are growing as well with the total store count now at 4,112 and this shows no sign of abating. It makes sense that Wal Mart holds a significant spot not only in Berkshire’s portfolio but Inside Value’s as well as both a Core holding and Best Buys Now.

Foolishly,

Jason
TMFJMo (long BRK/B)

3 Comments – Post Your Own

#1) On April 26, 2010 at 1:19 PM, lemoneater (80.70) wrote:

Thanks for the info about Walmart. However, Walmart needs to be careful about customer perceptions. My husband was under the impression that Walmart was going under like Jamesway because our local store was significantly understocked and has been for months. A few days ago I saw an employee that I knew. She explained that Walmart was remodeling numerous stores so they were keeping inventory low on purpose and were planning to restock the store after the re-model with new lower-costing merchandise. Why didn't management having signage saying what was happening?

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#2) On April 26, 2010 at 8:03 PM, Rags2Riches08 (< 20) wrote:

As an employee of Wal-Mart and a fomer stockholder, I can definitely say Wal-Mart is in trouble.  The understock issue that lemoneater brought up is nothing new nor is it going away.  I have been working for the company for the past 12 years so I know when I say this has been going on for several years. 

 Also, the variety at Wal-Mart is no longer there.  We have had an increase in customer complaints over items that we no longer carry for stores that have been remodeled. 

 In truth, yes, the remodeled stores are leaner, more efficient, and more cost effective, but it comes at the expense of the customers and employees.

 This post is just about the item issue that lemoneater brought up.  Any other issues dealing with Wal-Mart, I might put in a post later on.

As far as the statements from TMFJMo, try talking to some of the seasoned employees that work there and ask them about the changes that have been going on recently and then you will see why Wal-Mart has already peaked years ago. 

 

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#3) On April 27, 2010 at 9:13 AM, TMFJMo (70.84) wrote:

Thanks to both for your posts and perspective.  It is always nice to hear points of view...that is what paints the fuller picture of what a company may be going through, whether it could be considered a worthwhile investment, etc.

Rags2Riches08 makes an interesting point in regard to Wal Mart peaking years ago.  I remember when Wal Mart was a better experience for sure.  I don't frequent Wal Mart all that often, but I remember also back when Target first started making headway into this market as well and there was a perception that they were doing something better.  It seemed that it was a better overall experience I think.  I mean prices are prices and they are all trying to compete.  It makes me wonder now though what is going to be the next Target? 

I for sure believe that the Wal Mart growth story has come to fruition.  It has "peaked" in that sense.  The investment thesis behind this one relies on a consistent, well-established retail behemoth that, though it isn't likely to double from today's levels, it will provide some dividend-paying stability and even some international exposure to any portfolio.  Do you get a feeling from an employee's perspective that they may be trying to do something new?  To almost re-invent themselves?  And if so, is this a good thing or a bad thing?  Do you get a sense that the employees feel like they are part of something special?  Thanks!

Jason (no position in any companies mentioned)

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