Buffett, Berkshire and Wal Mart
April 26, 2010
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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)
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