YCHARTS.com's  Instablog

Below we analyze the earnings yields (EPS/Stock Price) for Berkshire Hathaway’s current holdings:

• Gannett - GCI Earnings Yield 18.70%
• NRG Energy - NRG Earning Yield 17.90%
• Torchmark - TMK Earnings Yield 10.82%
• Travelers - TRV Earnings Yield 10.10%
• Exxon - XOM Earnings Yield 8.47%
• Santefi Aventis - SNY Earnings Yield 8.29%
• Kraft Foods - KFT Earnings Yield 7.62%
• Johnson & Johnson - JNJ Earnings Yield 7.44%
• GlaxoSmithKline- GSK Earnings Yield 7.29%
• Proctor & Gamble - PG Earnings Yield 6.95%
• Moody’s - MCO Earnings Yield 6.91%
• General Electric - GE Earnings Yield 6.90%
• Union Pacific - UNP Earnings Yield 6.81%
• Beckton Dickinson - BDX Earnings Yield 6.64%
• Wal-Mart - WMT Earnings Yield 6.41%
• Norfolk Southern - NSC Earnings Yield 6.10%
• Lowes - LOW Earnings Yield 5.81%
• Comcast - CMCSA Earnings Yield 5.70%
• Burlington Northern BNI Earnings Yield 5.36%
• Home Depot - HD Earnings Yield 5.05%
• Coca-Cola - KO Earnings 4.78%
• Nike - NKE Earnings Yield 4.75%
• M&T Bank - MTB Earnings Yield 4.38%
• CostCo - COST Earnings Yield 4.10%
• UPS - UPS Earnings Yield 3.62%
• US Bancorp - USB Earnings Yield 3.45%
• Wells Fargo - WFC Earnings Yield 3.25%
• Carmax - KMX Earnings Yield 3.20%
• Iron Mountain - IRM Earnings Yield 3.15%
• Wesco Financial - WSC Earnings Yield 3.05%
• American Express -  AXP Earnings Yield 2.68%
• Republic Services - RSG Earnings Yield 2.40%
• Washington Post - WPO Earnings Yield .55%
• Bank of America -  BAC Earnings Yield .19%

Most of the holdings are yielding well above 10 year treasuries with strong consistent earnings paths.  This tends to bode well for future performance.  You can get rankings by earnings yield or any another metric here.

Earnings yield is a good starting point to quickly evaluate the relative yield on a company vs bonds.  Typically, you want a couple points above treasuries for the additional risk in equities and Berkshire Hathaway does this for the most part.  Check your stocks and see how many have earnings yields over treasuries.  You may be surprised with the results.

Disclosure: No positions

Walmart announced plans to accelerate growth with investments in emerging markets. Will they deliver shareholder value in the process?

Walmart already has a significant presence in international markets.  As of September 30, 2009 Walmart had 4,300 stores in the United States.  International units totaled 3,859 or 47% of stores.

“We’re stepping up growth in our international operations to take advantage of growing economies and opportunities in emerging markets, such as China and Brazil,” said CFO Tom Schoewe.

The company expects 1% to 2% growth this year.  Next year is expected to increase to 4% to 6%, inline with historical revenue growth levels.

In the long-run earnings and prices are highly correlated.  Just look at a long-term chart of the S&P500 and the corresponding earnings chart. The market tends to over shoot the up and down swings in the short term but over time earnings always drive the price in a regression to the mean.

Walmart has consistently grown revenues and profits for the last decade but the market has taken this growth and continued to lower the multiple on earnings.  Market saturation of stores in the U.S. has led many to stay away from the stock but WMT may be worth a second look with the focus on international markets and their urban strategy.

The chart below shows the market cap and EPS for the last decade.

The chart below shows the declining multiple the market is giving WMT over time.

Walmart has grown revenues from $40 billion a quarter in 1999 to over $100 billion a quarter currently but the market cap decreased from $250 billion to $194 billion during this massive growth.

Analysts have been hyping Amazon.com recently on the notion that they are taking share as everyone goes online to buy goods that are traditionally sold at Walmart and Target.  It does appear that Target is losing the online battle but Walmart is not losing share to Amazon based on Compete.com metrics.  Amazon is bigger online but the YoY change in traffic is +23% for Amazon.com and Walmart.com.

Also, keep in mind the relative size of the firms.  See below the revenue for Amazon.com, Walmart and Target.

The market has discounted Walmart over the last decade.  With an attractive dividend yield over 2%, earning yield near 7% and consistent growth and profit margins we would be a buyer of WMT on any major market pull backs.  Our proprietary models value WMT in the $59 to $65 range.  We would be an aggressive buyer in the mid 40’s.

Disclosure: No Position

Ameritrade (AMTD) and E*TRADE (ETFC) report earnings today.  AMTD reported earnings of $.26 before the bell beating analyst estimates by $.04.  The online broker said Q4 profits declined by 8.9% but trading activity reached the highest quarterly level ever.

• Average client trades per day surged to 411,000 in Q4, up 35% YoY and up 5% sequentially.
• Client assets increased to $302 billion, up 8% from $278 billion a year ago.
• Net new client assets $5.4 billion.
• TD Ameritrade posted a profit of $156.7 million or $.26 cents a share below the $172 billion reported a year earlier.
• Revenues increased by 1.3% to $657.9 million.

FY 2010 guidance and valuation for AMTD:

The average AMTD analyst estimate for 2010 EPS is currently $1.26, in the middle of the company provided range.  Analysts have the revenue estimates at $2.68 billion for 2010 also in the middle of the range provided by company management.  Our proprietary YCHARTS valuation model has AMTD valued at just under $20 a share so we see the upside limited with the stock currently at $19.36.

E*TRADE reports after the bell today.  Expect continued strong performance from the brokerage unit.  The loan portfolio results and guidance are key.  E*TRADE took huge losses over the past several quarters related to the loan portfolio.  Analysts are expecting a loss of $.06 on revenue of $202M. 

Source: Yahoo! Finance

Recent Events

Analysts at Citi and FBR Capital upgraded ETFC shares but the stock has traded sideways.  In addition, Citadel diversified its holdings selling a large number of shares recently that put pressure on the stock.

Valuation

It is hard to put a value on E*TRADE given the negative earnings but the price to sales ratio tends to provide a good signal for companies that are experiencing rough times.  ETFC is currently trading well below its peers.

E*TRADE continues to deal with the hangover from the credit crisis but recent guidance suggests the worst is over.  On 9/15/09, E*TRADE provided guidance on the loan portfolio with estimated net charge-offs of $350 million to $375 million and estimated provisions for loan losses of $300M to $375 million.

E*TRADE Business Update Highlights 9/15/09:

• Exchanged $1.7 billion of high yield debt for zero coupon convertible debentures which reduced annual interest payments reduced by $198 million.
• QTD DARTs 17% increase YoY
• Record accounts 8.5% increase YoY to 2.7 million brokerage accounts.
• Home Equity delinquencies significantly lower, down 34% YTD
• 1-4 Family delinquencies gradually lower, down 12% YTD
• Loan loss provision and internally generated bank capital reaching break-even point.
• 29% decrease in loan portfolio from 9/30/07 to 6/30/09, $32.3 billion and $22.9 billion respectively.
• 77% reduction in undrawn home equity lines.

Here is the deck E*TRADE management presented 9/15/09

ETFC Summary

• Consider recent analyst upgrades
• Improving loan portfolio trends
• Much lower interest expense
• Brokerage business strength
• Relative price to sales valuation
• Potential for acquisition

If the economy improves in 2010, expect E*TRADE to trade up significantly from here and the loan portfolio trends to continue.  There is significant risk in ETFC given the level of uncertainty in the loan portfolio and the real estate market overall but we see the risk/reward as positive at these levels.

Disclosure: Long ETFC