Is Warren Buffett Right about Walmart?

Uncle Warren shocked the markets; and rattled a lot of value investors, when he sold almost every share of Walmart (NYSE: WMT) he owned. Berkshire Hathaway (NYSE: BRK.B) sold $900 million shares of WMT and bought airlines and Apple (NASDAQ: AAPL) instead.

Not surprisingly the professional Walmart haters out there pointed to this as proof that the world’s largest retailer is finished. They were ecstatic because theS of Omaha is proving their thesis that Amazon (NASDAQ: AMZN) is about to kill off Walmart.

Some Explanations for Buffett’s Walmart Sell Off

Those bears might be jumping the gun because there are other explanations for Buffett’s decision to dump Walmart. They include:

1. The Berkshire team thinks Walmart shares are overpriced and about to take a big fall. That might mean they think they might be able to pick up a lot more WMT at low price at some point in the near future.

2. They think there are better deals out there such as airlines. Note: I’m skeptical of airlines at this point, but I’m not going to second guess Warren Buffett.

 

3. Buffett likes Amazon and dislikes Walmart. Something that a lot of us stock geeks overlook is that Buffett has been bullish on Amazon for a long time. Uncle Warren has never been fond of the Everything Store’s stock, but he’s been investing in the company’s debt for a long time. He bought $98.3 million worth of its junk bonds back in 2003. Therefore Buffett was an Amazon bull long before it was fashionable. He’s also on record as a Jeff Bezos fan.

 

4. Uncle Warren knows something we don’t. Buffett is heavily invested in a number of consumer sectors and he watches statistics and financials like a stock. Buffett might have noticed some trend that others are missing.

5. Walmart might not be able to match Amazon’s resources. Amazon reported having $25.98 billion in cash and short-term investments on December 31, 2016. Walmart had just $5.939 billion in the bank on the October 31, 2016.

 

6. Walmart is losing float, something Buffett loves. In July 2016, Walmart reported cash and short-term investments of $7.676 billion that fell by $1.7379 billion over the course of third quarter 2016 to $5.939 billion. Buffett family loves float and dislikes companies that cannot generate it.

 

Okay so there might be good reasons why Buffett is bearish on Walmart. Yet we should listen to him because Buffett predicted the Retail Apocalypse

Warren Buffett Predicted the Retail Apocalypse

He also has very good retail instincts, back in 2005, Warren predicted the slow moving catastrophe at Sears (NASDAQ: SHLD) and Kmart.

“Eddie is a very smart guy but putting Kmart and Sears together is a tough hand,” Buffett University of Kansas students. “Turning around a retailer that has been slipping for a long time would be very difficult. Can you think of an example of a retailer that was successfully turned around?”

Back then Buffett believed that department stores were doomed because they were operating at a 35% gross margin, while Costco (NASDAQ: COST) operated at a 10%-11% gross margin, Business Insider reported. It turns out that Buffett was right and the Oracle of Omaha can predict the future. His words were absolutely prophetic.

“Department stores will keep their old customers that have a habit of shopping there, but they won’t pick up new ones,” Buffett predicted. That’s exactly what’s happened JC Penney (NYSE: JCP) actually targets its’ marketing at 60 year old women whom it targets with printed mailers, it has effectively written off customers under 50.

Given that track record it is easy to see why people are reading so much into Buffett’s Walmart sell off. After all he was one of the few people who saw both Amazon and the retail apocalypse coming. Yet is Walmart still a good investment or not?

Walmart is Sort of Succeeding at Ecommerce

Walmart has made some smart moves over the past year such as buying Jet.com, launching Walmart Pay and investing heavily in pickup. It has also made what I consider some bonehead plays including killing Shipping Pass and buying the sporting goods retailer Moosejaw.

Shipping Pass was a pretty savvy play because it offered a low cost Amazon Prime alternative. Yet Walmart did nothing with it, and its new online boss Marc Lore boss killed the service. That pissed off a lot of Walmart customers myself included, but it is at least an understandable move.

A much dumber play was buying Moosejaw at a time when standalone sporting goods retailers are dying off like flies. It makes little sense unless Walmart is trying to establish a stable of online retailers. Although Moosejaw may have some proprietary technology or expertise Walmart wants.

Despite that Walmart is doing a pretty good job of ecommerce. It often undercuts Amazon’s prices and its level of service rivals and sometimes exceeds Amazon’s. I’ve found that it’s not as good as Jet’s yet but it is close.

My guess is that Uncle Warren might be concerned about the lack of direction at Walmart which is reminiscent of that at Sears. Sears bought companies that were incompatible with its core business and launched some weird retail experiments over the past 10 years.

Walmart is Still a Good Investment

Now for the big question is Walmart still a good question the answer is yet. It’s still paying off for investors despite all its troubles.

Here’s what the latest financial numbers for Walmart, those from Halloween 2016, show:

• $484.6 billion in revenues.

 

• A profit margin of 2.57%

• A diluted earnings per share (EPS) number of 4.61

 

• A free cash flow of $1.873 billion.

 

• A return on equity of 18.56%.

 

• Assets of $206.86 billion.

• Cash and short-term investments of $5.939 billion.

 

• $32.03 billion in cash from operations.

 

Walmart shareholders received a dividend of 50¢ on December 7, 2016, which was higher than Costco’s 45¢. This means Walmart is still a good company with a great stock, it just has a cloudy future.

My take is that Walmart will be a pretty good company for some time to come but it bears watching. There are some underlying problems there; especially a lack of direction, which might threaten the retail giant’s future.

Walmart’s sheer size and its technological capabilities give it a large moat, but that moat is eroding faster than we think. We need to pay close attention because this money maker might soon become a serious liability.