Did Warren Buffett’s Walmart Investment Pay Off?

Between the years 2002 all away through the end of 2011, shares of Walmart Stores Inc. basically went nowhere. Their price remained somewhere in the upper range of $50 per share. As a matter of fact, in 2012 FPA Capital Advisor member Stephen Romick called Walmart an “infinite duration bond with a rising coupon.” Very recently, many investors have jumped on the bandwagon for Walmart as the stock has increased in share price a total of 21% year to date. It’s currently approaching its fair market value, as well as making Warren Buffett and his Berkshire shareholders that much richer.

Buffett increased Berkshire Hathaway’s holding of Walmart by 7,892,342 shares in quarter three of 2009 at average price of $50 per share. He did this again during the fourth quarter of 2009 where he purchased 1,200,500 shares at an average cost of $52.50 per share. Not to outshine his own brilliance, he also bought another 7,671,000 shares at an average price of $61 during the first quarter of the year 2012. This was right before Walmart’s stock price rose about $12 per share to the price of $72.98 according to their latest quote at the time of this writing.

At the current price of nearly $73 per share, Walmart is steadily approaching its fair market value. Even though its stock price has remained flat for a decade, Walmart EBITDA actually grew at a rate of 11.3%, and it reached record earnings per share at $4.54 per share in the fiscal year of 2012. Back in 2003, Walmart’s price to earnings ratio was at a height of 33. When Buffett decided to add on to his portfolio in the first quarter of 2012, the P/E was only 13 and very near to its ten-year low. Walmart’s P/E has currently risen to 15.5.

The revenue of Walmart has steadily increased each year consecutively, and this is especially telling since we have gone through a recession during part of the last decade. The revenue has reached a record-breaking height of $447 billion in the fiscal year of 2012. Walmart’s gross margin has also been on a trend that is ever-expanding.

Another thing to note is that Walmart is going to continue to increase its dividend in 2012. The board approved a dividend increase from $1.46 per share to $1.59 per share for fiscal year 2013. This equals to a payout of $5.52 billion. The company has steadily increased its dividend every year since the year 1974. Last year Walmart’s dividend was raised by a total of 20.7%. The company also bought back $6.3 billion worth of shares during the fiscal year 2012.

GuruFocus valued shares of Walmart at a fair market value of $78 per share last year, and they based this off of an assumption that Walmart would have a 10% earnings per share growth rate over the next 10 years. They also based it off of a 3% terminal growth rate. Today the stock trades at around $73 per share, which is right near its fair market value. This makes it an increasingly risky investment for those who are thinking about getting in at the current price.

Currently, GuruFocus has Walmart valuation showing that the current stock price is actually higher than its valuation numbers. The Graham number for Walmart is $39.26 per share, and the Peter Lynch fair value is $38.10 per share, while the intrinsic value is $58.63 per share.

Berkshire Hathaway’s share prices rallied recently as well, and they reached their 16-month high. Berkshire share prices are up about 10% year to date, and the current value of one share is worth $125,321. Berkshire made an announcement on May 4 which says they improved their operating earnings of $2.7 billion, which is up from $1.6 billion in the first quarter in 2011. They also said their net earnings were $3.2 billion, which is up from $1.5 billion in the prior-year quarter. This is the third consecutive year of increases for Berkshire Hathaway.

During an interview that Warren Buffett did on CNBC recently, he commented that he was actually a lot more worried about the US economy potentially shrinking, which would slow the growth of consumer spending and would obviously slow down and affect many businesses in the US. He’s also concerned that this might push investors to more “safer” stocks of the larger companies. Another thing that Buffett believes is that the housing market is also picking up, which would be a large benefit to Berkshire Hathaway, since it owns Clayton Homes, which is one of the largest homebuilders.

The current Graham number of Berkshire Hathaway stock is $116,768. There is no intrinsic value or Peter Lynch value.

One bright spot is that Buffett is still very optimistic about the US economy even though it is going to slow down. He said “I love owning businesses in the United States. We’ll invest $9 billion almost in the United States almost at Berkshire this year. I am a bull on America. We have to run it right, that’s all.”

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