Normally following the Oracle of Omaha's investment decisions makes sense. But, he might have missed the mark in this case as Walmart's better-than-expected fourth quarter earnings have sent the stock nicely higher.
Here is why Buffett may want to buy a new pair of eyeglasses and look at Walmart again.
The holiday season was solid.
Walmart's recent results show continued progress on its transformation, which includes keeping shelves better stocked and offering more items for sale online. The company saw comparable store sales at its Walmart U.S. division rise 1.8% in the fourth quarter. Comparable store sales are perhaps the single most important metric for a retailer as it gauges business from stores open longer than a year.
What's more, the company posted 29% growth in e-commerce sales for the quarter. For comparison, Amazon's (AMZN) - Get Amazon.com, Inc. Report revenue (including Amazon Web Services revenue) grew 22% in its most recent quarter.
In short, the company's fourth quarter results point toward continued momentum for Walmart this year.
Walmart is a cash return machine.
In fiscal 2017, Walmart spent nearly half of its operating cash flows on share repurchases and dividends. It is likely the company sustains this level of dividends and repurchases going forward due to its solid sales trends. If it does, Walmart will have a shareholder yield (dividends plus share repurchases) of nearly 7% at current prices. That's darn attractive.
The stock just looks cheap.
Walmart is currently trading on a trailing-twelve month price-to-earnings ratio of just 15 times. For comparison, the S&P 500 is trading on a price-to-earnings multiple of 26 times.
A multiple of 15 times multiple is too cheap for a high-quality business such as Walmart with a shareholder friendly management team and board of directors. If Walmart's price-to-earnings ratio rises, as one could expect due to its business momentum, shareholders will see additional gains.
I am long WMT.