Buffett's Wal-Mart investment is paying off

The Berkshire Hathaway CEO has benefited from a recent rise in the retail giant's stock.

By GuruFocus.com Jul 13, 2012 2:26PM

 Walmart copyright Bloomberg/Getty ImagesFor about ten years, from 2002 to the end of 2011, Wal-mart (WMT) shares went virtually nowhere, remaining in the upper $50 range. In fact, a year ago FPA Capital Adviser's Steven Romick called the company an "infinite duration bond with a rising coupon."

Recently, however, investors have jumped on the Wal-Mart bandwagon. The stock has increased 21% year-to-date, approaching fair value and making Warren Buffett a richer man.

Buffett increased his holding of Wal-Mart by 17,892,342 shares in the third quarter of 2009 at an average price of $50, and again by 1,200,500 shares in the fourth quarter at an average price of $52.50. He then brilliantly bought 7,671,000 shares at an average price of $61 in the first quarter of 2012, just before the stock surged more than $10 to $73.06 as of Friday afternoon.

At the new price, Wal-Mart is approaching fair value. While its stock remained flat for a decade, Wal-Mart's EBITDA grew at 11.3%, and it had record earnings per share of $4.54 in fiscal 2012. In 2003, Wal-Mart's price-to-earnings ratio (P/E) was as high as 33. When Buffett bought more in the first quarter, the P/E was around 13, near its 10-year low. This has since risen to 15.5.

Wal-Mart's revenue has increased each consecutive year, including through the recession, for the last decade, to a record $447 billion in fiscal 2012. Its gross margin has also been on a widening trend.

The retail giant continues to increase its dividend. In March, its board approved an increase from $1.46 to $1.59 per share in fiscal 2013, an equivalent of paying about $5.52 billion. This continues the company's history of increasing its dividend every year since 1974. Last year, it raised its dividend 20.7%. The company also bought back $6.3 billion worth of shares in fiscal 2012.

Last year, GuruFocus valued Wal-Mart with a fair value of $78, assuming a 10% earnings per share growth rate over the next 10 years and 3% terminal growth rate. It now trades  just over $73, near fair value, with a reduced margin of safety.

Now, GuruFocus' valuation tab shows the stock's price as higher than its valuation numbers. Its Graham Number is $39.26, Peter Lynch Fair Value is $38.10 and Intrinsic Value (DCF) of $58.63.

On Friday, shares of Buffett's company, Berkshire Hathaway (BRK.A)(BRK.B), rallied too, to their 16-month high. The stock is up more than 10% year to date to $126,234 for one share. On May 4, Berkshire announced improved operating earnings of $2.7 billion, up from $1.6 billion in the first quarter of 2011. Net earnings were $3.2 billion, up from $1.5 billion the prior-year quarter, marking the third consecutive year of increases.

In an interviewwith CNBC, Buffett said he was more concerned that the U.S. economy is shrinking and growth slowing as consumer spending begins to sow and affect businesses. This could be pushing investors toward "safer" stocks of large companies. Buffett also believes that housing is picking up, which would benefit Berkshire, which owns the largest home builder, Clayton Homes.

Berkshire Hathaway has a Graham Number of $116,768 and no Intrinsic Value (DCF) or Peter Lynch Value.

Buffett says he is still optimistic about the economy in spite of the slowdown. "I love owning businesses in the United States. We'll invest $9 billion almost in the United States at Berkshire this year. I am a bull on America. We have to run it right, that's all,” he said.

See Warren Buffett's current portfolio here.

More from GuruFocus

Jul 13, 2012 4:39PM
The liberals must love Warren for being a big Walmart Guy!!!

Jul 13, 2012 10:26PM
Hi,  for the last 20 years I have owned Wal-Mart stock, I have never lost money , even during the stock market  down swing in 2008, I think when it hits $80.00 it will split !
Jul 13, 2012 5:40PM
You'll see how smart he is when all his newspapers pay off big time. !
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