Warren Buffett Sells More Wal-Mart Stock

Berkshire Hathaway’s position in Wal-Mart (WMT) stock, which hit a high of 60 million shares at the end of 2014, has been slashed to 13 million shares as of Berkshire’s most recent quarterly filing.

Although he has not connected the dots explicitly, Warren Buffett’s sale seems to suggest that he believes Amazon is going to crush Wal-Mart’s moat and eat into its profits over the coming years.

The basis for my opinion is that Warren Buffett has long been obsessed with competition in the retail landscape.

Check out this passage from Alice Schroeder’s snowball on page 524 in which she discusses Warren Buffett’s first attempt at socializing Gates with his business friends:

“Bill Gates was coming to the latest meeting of the Buffett Group in Vancouver, British Columbia for the one particular session that interested him. The Buffett Group was going to review the ten most valuable companies in 1950, 1960, 1970, 1980, 1990–and how the list had changed. Tom Murphy and Dan Burke, who both served on IBM’s board, started talking about why IBM, the leader in hardware, hadn’t gone on to become the leader in software. The conversation continued. If you were Sears in 1960, why couldn’t you keep getting the smartest employees and selling at the best prices? What was it you couldn’t see that prevented you from remaining the leader? Most of the proposed answers, regardless of the company, revolved around arrogance, complacency, and what Buffett called the ‘Institutional Imperative’–the tendency for companies to engage in activity for its own sake and to copy their peers instead of trying to stay ahead of them. Sometimes managements weren’t attuned to tectonic shifts in their industry.”

I suspect Warren Buffett is spooked by Amazon Go’s foray into the grocery industry that involves technology that won’t even require you to go through the checkout process. Heck, this was supposed to be IBM’s big technological contribution in the 1990s, but the hype never materialized beyond the commercials.

You guys already know about Amazon’s 28% annual revenue growth this past decade, but to throw out statistics weighing on Buffett’s decision that  you don’t hear explicitly carved out as much: (1) 92% of online shoppers visit amazon.com for online shopping before visiting walmart.com; (2) 76% of Americans bought something at amazon.com in the past year, only 23% can say the same for Wal-Mart; (3) amazon.com shoppers spend over ten times as much on the site as do walmart.com shoppers; and (4) 43% of Amazon Prime subscribers state that their free shipping membership makes them exclusive shoppers at amazon.com.

So why hasn’t Buffett bought stock in Amazon (AMZN) yet? Because he sees the $2 billion in annual profits and $376 billion market capitalization. Buffett has spent his whole life dodging folly that looked exactly like that price to earnings relationship. An aversion to overpaying for stocks is responsible for the bulk of his wealth, and you can’t just let go of a strategy that has proven more effective than the investment strategy of literally every other person on Wall Street for the past half century.

As for Wal-Mart shareholders, I don’t think they are doomed. The acquisition of jet.com was a necessary, although costly, foray into e-commerce. The current management at Wal-Mart has not demonstrated the ability to effectively compete with Amazon, but acquiring budding competitors and letting them maintain their own cultures and management teams might lead to smooth integration with Wal-Mart’s core brick-and-mortar business somewhere down the line.

That said, I would insist on a discount for Wal-Mart shares before making a purchase. Right now, it’s at $70 per share. That falls somewhere in the band of a fair price. To get interested in Wal-Mart, I’d want to see the stock hit $60 or below. It has excellent pricing contracts with suppliers, dominates in groceries, generates $1 billion per month in profits, and has ample room for buybacks.

Even if it declines, there is still a whole lot of cash dividends that can get paid out to you in the meantime. But I would not make Wal-Mart a significant portion of my net worth, nor would I seek it out for purchase absent a 15% or greater discount to fair value. For me, that means Wal-Mart starts to look interesting as a buy under 12x earnings. The 12-16x earnings range is where valuation is fair, but due to competitive concerns, I’d rather buy something else. And if it trades over 16x earnings, it is moving into overvalued territory, and you wouldn’t want to buy such a mega-cap stock anyway.