What Berkshire Hathaway Has Been Buying and Selling

Walmart's (WMT -0.08%) same-store sales in the first quarter rose 6%. That was just one of the highlights from a strong report. Home Depot's (HD 0.94%) revenue in Q1 rose 33%, but shares fell slightly in part due to lack of guidance. Twilio (TWLO 1.47%) shares rose after it bought Zipwhip for $850 million in cash and stock. In this episode of MarketFoolery, host Chris Hill and Motley Fool analyst Asit Sharma analyze those stories as well as the highlights from Berkshire Hathaway's (BRK.A -0.76%)  latest round of buying and selling.

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This video was recorded on May 18, 2021.

Chris Hill: It's Tuesday, May 18th. Welcome to MarketFoolery. I'm Chris Hill. With me today, Asit Sharma, back in the house. Good to see you.

Asit Sharma: Good to see you, Chris. Always happy to be here on MarketFoolery.

Hill: We've got Warren Buffett and his team doing a little buying and selling. We have another acquisition in the tech world, but we're going to start with some earnings, and no bigger company to start with than Walmart. First quarter profits and revenue came in higher than expected. They raised guidance for the full fiscal year. Same-store sales in the U.S. were up 6%, which doesn't sound like a lot. But you think about this quarter a year ago, that was when people were doing all kinds of hoarding. This was a great quarter for Walmart and the stock is up 2%-3% this morning.

Sharma: This was a strong quarter. Every segment performed well. Actually, I'm quoting from Doug McMillon, the CEO, that was his lead statement in his commentary today, but it was a strong quarter.

Hill: I was going to say, he's not wrong.

Sharma: He's not wrong. Every segment did perform well. They had revenue increase about 2.7%, which, for Walmart, when your revenue is $138 billion and you're just trying to grab a percent or two on the bottom line, which will translate into huge dollars, that's not bad. This 6%, these are U.S. quarter one comparable sales, so year-over sales versus last year. Chris, you're right. They're impressive because who would have thought after just the phenomenal year that Walmart, along with other major retailers, enjoyed during the pandemic. Not that we're quite out of it yet, but we're getting there. Who would have thought that they would have such strong comp sales in the U.S., which is their major market. I wanted to pick this number a little bit, though. Not to criticize it, but just to figure out what's going on here. I'm reading from their segment results, and how did this 6% rise? They had a decrease of 3.2% in transactions. But the average ticket, the average spent jumped 9.5% over the fiscal first quarter of fiscal 2021. This is actually fiscal year 2022. That was up 16.5%. There's something in here. I'm going to take a wild guess that if transactions are declining, people still aren't headed into the stores and because that average ticket is getting bigger, I'm wondering if they're not going to truly have a drop-off now in a few quarters because this says stimulus money to me. This says people are still spending stimulus, which we know they were over the last few months. But any thoughts on that one, Chris?

Hill: I mean, I think stimulus is part of any equation when we're talking about major general retailers like Walmart. But one of the things they did talk about was their bigger ticket items that they sell. Selling more of those, that obviously helps boost the average ticket price, but also those are products that have a higher margin. It's going to be interesting to see where Walmart is in like six months or nine months because I think you're right. The stimulus money is going to go away at some point. But on the flip side, they could see a sizable increase in traffic. We could be sitting here six, nine months from now talking about similar numbers in terms of comps and what's driving it is traffic, not necessarily average tickets.

Sharma: That's a great point. I want to say that, in the U.S., staying with Walmart U.S., their biggest segment, operating income was up to $5.5 billion. If you look at that great quarter, a year ago quarter from last year, $4.3 billion in operating income. They put $5.5 billion on the book during the same period this year. This, I think, is the result of what you're talking about, selling bigger ticket items with that higher margin. But Chris, if they make it up, let's say as we go through this year and they make up some expected decline in this average ticket, with that traffic, will people start going to the stores? Yeah, maybe the operating income declines a little bit, but they will have proven a lot of the sales if they got to be incredibly sticky. You have to give them points for having set up their business to flourish during COVID and to really attract customers with the e-commerce portion. I think they've done a fairly decent job with that. I see that was up, again, in the U.S., that e-commerce contribution was about 360 basis points to the total of their comp sales. I think a strong quarter all around, but we should say, if you're looking for something to just worry about a little bit, Walmart International, those sales were down significantly. 

In constant currencies, if we ignore all that crazy stuff with currencies fluctuating against each other, they had a drop of about 11.4%. That's still $26.4 billion in sales. It's such a big company. Their operating income and constant currency actually increased about 41% to $1.1 billion in that segment. I guess the message here with Walmart is that these strengths that the company capitalized on over the last year, I think they are parlaying them into sort of, if not COVID-free future, let's say COVID-light future. Impressive and they are so big. Their footprint is so big around the globe. I love that they have invested in their supply chain and were able to pull this off because not every retailer was over the last year.

Hill: Speaking of impressive, Home Depot's revenue in the first quarter rose 33%. Profits were higher than expected. Global same-store sales for Home Depot were up 31%. Despite all that, the stock is actually down just a little bit at the moment. That could be the lack of guidance, and we can get into that. It could also be that shares of Home Depot were hitting an all-time high last week. This is not one of those SaaS stocks that has been cut in half over the past three months.

Sharma: True. I almost want to say that investors still should show Home Depot love. I know it's not near the all-time high. But these numbers, earnings-per-share, hit $3.86, so $3.86 versus $3.08 that analysts were expecting. Revenue, $37.5 billion versus just under $35 billion. These are pretty outsized beats on expectation. I think that Home Depot is another example of investing before the pandemic. They have this one Home Depot philosophy that they're going to really pour money into their supply chain, into the electronic order routing within the stores, into all the customer interfacing, places that they haven't stored, the kiosks. 

If you shop at Home Depot, I'm sure you've noticed this started before COVID, all these things have served the company really well. But we should say that part of this, too, is this huge, huge tailwind. A little anecdote here. We have a neighbor in my neighborhood, I live in Raleigh, North Carolina, so this is a hot housing market. Our two neighbors put their house up for sale, and they decided not to move. The issue is, in some metropolitan areas, even if you want to move, because home prices are so high, it's hard to rotate into another house. Houses are in short supply. You can't really capitalize on your equity. Then, of course, we talked about this last week, Chris. There's a lumber shortage, so many things are falling in Home Depot's favor, but people are stuck at home and they are renovating. This is an analyst story of home improvement for the original mass-market, do-it-yourself home improvement retailer, what better tailwind could they ask for?

Hill: Yeah. Matt Argersinger was on Motley Fool Money a couple of weeks ago, and to paraphrase what he said about housing, there are a lot of markets across America that are very hot right now. He said when you step back and look at homebuilders' ability to build homes profitably as fast as they can, there's only so fast they can go. Matty's main point was this isn't going to stop anytime soon. I think that one of the businesses this bodes well for is the home improvement business. I think that people just look around and say, "You know what? We were hoping to move, but we're going to be here a few more years. All right. Let's start fixing this up a little bit." I do wonder, though, about the guidance because we're not talking about a small company, and I think it is reasonable to ask the question. If a business like Walmart feels comfortable enough to offer guidance, how come Home Depot doesn't feel that same level of comfort?

Sharma: Maybe they don't want to jinx things. [laughs]

Hill: Could be.

Sharma: Yeah. Not to be too flipped, but the company refrained from their full-year guidance. I think part of this is just waiting for the other shoe to drop in that when Home Depot looks at its fiscal year projections, it's looking at a few things. They're a very macro-focused company, probably even more than Walmart. They remind me, in fact, of the old conglomerates, the way GE used to look before it gave out its guidance. They're worried about so many macro factors. They're worried about inflation. They look at that and see what is the ability of all these things to come together and affect the consumer. I think after COVID, management is probably a little worried. Do we get a perfect storm here where consumers have the desire to put a pause on home improvement projects? They've finished their near-term spending, then inflation is going to hit. Maybe stocks will go down, which creates a wealth effect where if you see the market go down, you don't feel like spending on that new deck. 

I think there's some conservatism there that's being pushed by what's happening in the greater economy. I was a little surprised. I mean, they're doing so well. I'm looking at their income statement as we speak, Chris. Just an extremely impressive structure here. Their gross profit was $12.7 billion, and they held their fixed expenses pretty steady. If you just look only at net earnings, they went from $2.2 billion to $4.1 billion year-over-year. You would think with that kind of confidence and the types of cash flow they are generating, they go ahead and take a risk. We're not sure, these are projections and not to worry about missing them. I'm, too, surprised with that, but I think we'll see a reversion to the norm next quarter. I think they will come out and give some kind of forecast. We'll see, we'll see. Hopefully, I will come back next quarter and we can chat about them.

Hill: Shares of Twilio are up nearly 3% this morning after the cloud computing company bought Zipwhip, which is a business text messaging company. Twilio paid $850 million in cash and stock. I'm not in the business of making market calls. Anyone who's been listening for a while knows that. But I do wonder, Asit, look, shares of Twilio earlier this year were at $450 a share. They've been cut by about a third. They came out last week with their first quarter report, and had really good numbers. They just spent nearly $1 billion to buy this text messaging company, and the stock is up. I look at those two data points and I wonder, should people who have had Twilio on their watch list stop waiting for the stock to drop further? Because it really does seem like, I mean, I know this is a strong growing company, but $850 million is still $850 million. It seems like, at a minimum, Wall Street likes this deal.

Sharma: Yeah. I think Wall Street is impressed by this deal, and it reinforces something that if you've been following Twilio, you're already familiar with. They themselves are not going to wait for their stock to drop. Just a few months ago, really, last year, they had an all-stock deal in which they made a massive acquisition and acquired a company called SendGrid, which works with email APIs. It's part of the same tack of technology that Twilio offers, which basically, in a nutshell, is helping you communicate with your customers through various channels in much better ways than you've been able to do so for buying their services. Now, the thing about this acquisition, it's following the same moat. They're still using their stock. It's half stock, half cash. Between these two deals, you have several billion bucks worth of acquisitions, and they've only put down $400-odd million in cash between these two deals. In the meanwhile, their own organic sales are growing at these huge double-digit rates. Both acquisitions will be accretive to the bottom line within a very near time frame. 

I think that if you're waiting for Twilio to come to some type of trough where you feel more comfortable buying it, maybe look at the long-term future more and, I don't know, dollar-cost average in. If you like this company, I think it's a very strong company. I just like the way that management would have followed a model more like Salesforce and just been a serial acquirer. There are a lot of companies, smaller companies to buy in this space, but they're so focused on their own products. Anything else they have been doing in the marketplace in terms of M&A has been gravy. As I say, they've been doing it with stock. If your stock has gone up 60% in a year and you suddenly have a senior market capitalization at $60 billion or $70 billion, it's OK to use some of that stock to buy other companies. In fact, I would do the same thing if I was steering the wheel there. A lot to like with this company. Risks as ever, it's a competitive space, but point well taken, Chris. I mean, just the dollar-cost average.

Hill: Berkshire Hathaway made some changes to its investment portfolio in the first quarter as it tends to do. Let me hit you with a few of the highlights, you tell me what stands out to me. Berkshire Hathaway added 17 million shares of Kroger, more than 12 million shares of Verizon. They took a stake in a British insurance company called AON. They sold half the stake that they had in Chevron and most of the remaining stake they had in Wells Fargo. There were others. Those are the ones that leapt out at me. What stood out to you?

Sharma: Yeah. I mean, those were very interesting. I mean, just a couple of comments on them. Yeah, Chevron. What were you waiting for, Berkshire Hathaway? The AON investments I think it's good. It's in their alley. It's a successful insurance company. Getting rid of that Wells Fargo stake is also long overdue. I put that in the Chevron category. It's like, "Why?" I think some of the things that stood out to me were cutting some of the stakes that they had taken very recently. The company had invested in AbbVie. I think last year they've already cut that stake by 10%. Going back to another one you mentioned, though, Chris. Kroger, so interesting because the way that that acquisition looked, the acquisition of shares, sorry. I don't want to confuse anyone. They didn't acquire the company, they've just been buying shares as with all these. When that happened, this was early last year they took their first stakes in Kroger. It looked like one of Buffett's lieutenants was probably behind it, but they are starting to nibble more. They like the industry. 

I myself am skeptical about the grocery industry. I've spent so much time in this space, losing money on stock investments in the grocery space learning about it. But from a value perspective, when Berkshire Hathaway took their first stake in Kroger, it looked persuasive. I mean, the stock was undervalued at that point and, of course, it got a boost from COVID. They like what they are seeing with the investments that Kroger has made in technology, delivery, ordering online, picking up at the store, these types of things. As we were chatting before this story, they have to put their marbles in these huge market capitalization companies. There is just no other way for Berkshire Hathaway to move the needle for its returns as it's buying up shares of publicly traded companies. What we're seeing here is a little more shifting than we're used to in the fact that Berkshire Hathaway is buying and selling some companies just quarters after taking the first stake. We can't forget selling out the airlines last year at probably the worst possible moment. What I like about all of that, though, is it shows Buffett's never-ending ability to try to understand the markets, to reinvent himself if he has to. I think it says a lot about the company that they are shifting into some sectors where they see promise and getting out of some that they should have done long ago. I don't know. What are your thoughts on holding onto companies like Chevron and Wells Fargo that seemed like maybe no-brainers to trim this position years ago?

Hill: Yeah, the Wells Fargo one always had me scratching my head. I think that Warren Buffett, maybe to a very slight detriment, held onto those shares and gave management the benefit of the doubt. It's easy to say in hindsight, but they really didn't deserve it at all just with all of the problems that they had. To the extent that anyone in the executive suite at Wells Fargo was still hanging on to the unofficial motto that this is Warren Buffett's favorite bank, that's over. [laughs]

Sharma: Yeah. I've heard many arguments that not only is this Warren Buffett's favorite bank, but it's trading below book value, which, of course, now it's pumped up slightly over that. I've heard many arguments of why you should buy Wells, but now if they've trimmed what, 98% of that position, you can sell it too. I hate to be so pejorative about such a big bank, but until management really gets the message that they've got to run the company in a clean and efficient manner, I don't see that they will ever be able to raise that stock price up significantly. They're going to have to demonstrate to the market that they're running that ship with integrity and it's going from the top-down through all those layers of managers that always seem to get the news on a predictable quarterly basis for some hanky-panky, Chris.

Hill: Well, it's something we talk about all the time because we get the question all the time, ''Well, should I sell this stock?'' One of the reasons to sell a stock is, is the thesis broken? The basic thesis, as I understand it for many years, for Warren Buffett, when it came to Wells Fargo was, of the big banks, this is the one that does business differently. They're not doing the black box investment banking stuff that I don't completely understand. I'm saying I personally don't understand. Buffett was saying, ''Look, Wells Fargo is much more straightforward and they are very straightforward with the way that they do business.'' All of the scandals that they've had over the past six years blew that thesis up.

Sharma: Yeah, and it just shows that no one is perfect, even Warren Buffett can not just make mistakes about stocks, Chris, but make mistakes about businesses and management teams. So, there you have it. But I applaud his ability to keep moving and learning and trying to improve his returns by doing rational things like selling shares of a company that just isn't performing anymore.

Hill: Asit Sharma, great talking to you. Thanks for being here.

Sharma: Thanks so much, Chris. This was fun.

Hill: As always, people on the program may have interest in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of MarketFoolery. This show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening. We'll see you tomorrow.