Board: Berkshire Hathaway
Taking a lesson from Berkshire valuation exercises, sometimes it’s helpful to look at the value of the underlying operating business(es), and then (separately) look at the company’s capitalization. This has been hammered into Berkshire shareholders’ so persistently that it’s hard to do otherwise. Further, if we were buying the entire business – not just shares - we’d be fully focused on looking at value this way. We’d value the business itself, its cash and securities, and consider its financing - all distinctly.
Costco and Walmart have remarkably similar operating performances, in terms of their return rates on net capital employed in the businesses. But Walmart employs more leverage – which, incidentally, it’s been able to get at historically low rates (some of its short-term borrowings last year were at less than 1% interest). Costco, meanwhile, avoids debt and holds onto considerably more cash than it needs for its operations (we might add the reminder that Munger is on Costco's board).
Costco’s conservatively invested cash and securities are currently equivalent to 45% of the company’s shareholder equity - a considerable ROE anchor. Walmart’s low-cost long-term debt, meanwhile, is equivalent to about 60% of its shareholder equity (and if it were debt-free its equity would be 60& higher).
From a business value perspective – if we were buying the entire companies – we’d likely value the business enterprises similarly (on a proportionate basis). Then, as a next step, we'd the look at the cash we might be acquiring, and the debt we'd be assuming.
From a minority shareholder valuation perspective we might favor leveraged Walmart - with it's enhanced returns to shareholders. Unless we thought Costco might get shareholder-friendly religion and distribute all that cash to owners (then we could talk about borrowing for expansion.)
Both are solid, similarly efficient companies. One is rock-solid conservative. The other is highly tuned to specifically maximizing shareholder value. Not that the market has noticed.