I spent most of the week in Las Vegas at the MoneyShow; my thanks go out to all those who stopped by Morningstar's booth or came to see one of my presentations. One question I have: When the heck did Vegas get so expensive? I remember the days of free drinks and $1.99 prime rib; now it seems hard to get a halfway decent meal for under $30. C'est la vie.

In any case, as I turn to our Tortoise and Hare portfolios, the news of the week was dominated by the only two earnings reports we received, from Autodesk ADSK and Wal-Mart WMT.

Let's start with Autodesk, since that stock had the most dramatic movement, down 18% at one point today. To be honest, I fail to see what prompted the big negative reaction. The earnings in the most recent quarter looked very solid, with year-over-year revenue growth of 11.8%, operating income growth of 19.6%, and EPS of $0.34 versus $0.29 last year. The forward guidance was slightly lower than expectations, but far from catastrophic. At the midpoint of its new range, the company expects 8% revenue growth next quarter and 10% revenue growth next fiscal year, accompanied by mild operating leverage that should increase operating profit margins another percentage point or two. Granted, the company's new guidance is a couple pennies below the EPS estimates for the coming quarter, but the punishment inflicted on the shares comes nowhere close to matching the crime, so to speak.

Our ratings of Autodesk are under review at the moment while we transition coverage to a new analyst. I will say that I am much more interested in the stock today near $30 than I was just a few short weeks ago when it was above $40. I expect it to be about two more weeks before our fresh look at the firm is complete and our new fair value estimate is published.

Turning to Wal-Mart, its earnings looked quite good, and the market price of the stock reflected this, bucking the waves of selling in the wider market. Total revenue was up 8.5% year-over-year, operating income was up 8.3%, and EPS came in $1.09 versus $0.97 last year. Reflecting the company's ongoing share repurchases, diluted shares outstanding fell 2.5% from a year ago. Other bright spots included a 3.0% increase in same-store sales in the quarter for the U.S. operations and a 21.2% jump in operating income from the firm's international operations. In terms of the underlying business, things look quite solid at Wal-Mart today.

As far as the stock goes, I think Wal-Mart falls squarely into the "hold" bucket at this point in time, trading in the neighborhood of our $61 fair value estimate. While not anything close to a hot potato that we need to sell immediately, I nevertheless view the Tortoise's current Wal-Mart position as a potential source of funds, if new opportunities arise. In other news of the week ...

--Vulcan Materials VMC saw its stock fall precipitously on Wednesday following a presentation by David Einhorn of Greenlight Capital that panned rival firm Martin Marietta MLM. I'll be digging deeper (pardon the pun) into the presentation this weekend, but at this point I see no reason to change my basic thesis on Vulcan. I'm confident that residential and commercial construction activity is likely to pick up in coming years from current cyclical trough levels. Then, once higher volumes kick in, the company should enjoy some operating leverage over its fixed costs, allowing for profit growth at a higher rate than revenue growth. I still think Vulcan is safely in "buy" territory here near $35.

--Berkshire Hathaway BRK.B announced a couple new purchases for its portfolio, including all but one of the newspaper businesses currently owned by Media General MEG. Berkshire also bought new stakes in media firm Viacom VIAB and automaker General Motors GM. I think narrow-moat Viacom is the most attractive of these businesses, followed by GM. Regarding GM, the company may not have an economic moat, but it does appear to be in the midst of a major cyclical upswing and does look cheap, trading at less than half of our $48 fair value estimate.

On the other hand, I'm not sure I see the same value that Buffett does in the newspaper businesses, given the ongoing shift in consumption patterns for information. Buffett stated at the annual meeting in Omaha that newspapers used to have a stranglehold on all types of information for consumers, though now their relevancy had shrunk to just local news. Fair enough, but the barriers to entry in providing even local news also only continue to decline. I hope I'm wrong, but I don't like the odds on these particular investments.

Either way, the newspaper buy is small enough ($142 million in cash) that it really does not move the needle for the firm, which had $176 billion in shareholder equity and the end of the first quarter. With the stock trading right at 1.1 times book value, Berkshire is one of my absolute favorite opportunities today.

No doubt the biggest market news of the day was the IPO of Facebook FB. Here's my $0.02: The business represents the real deal and has a wide economic moat, based on the network effect. The financials also support the wide-moat rating: Over the past twelve months, Facebook has achieved roughly $1 billion in net earnings, a 43% operating margin, a 24% net margin, and nearly triple digit returns on invested capital. It did all this despite being a relatively young company still in rapid-growth mode (45% year-over-year revenue growth last quarter). This is a company I'd love to buy at the right price.

However, the valuation of the stock is another matter entirely. At $42 (where the stock opened), it is simply overpriced. Our fair value estimate is $32 per share, and adding a margin of safety to that, I wouldn't be interested in buying until the shares hit at least the mid 20's, if not lower. In short, it looks like a "great business, overvalued stock" situation.

Paul Larson
Equities Strategist
Editor, Morningstar StockInvestor

Now on Twitter: @StockInvestPaul

Disclosure: Paul Larson owns shares of the following stocks mentioned in this e-mail: ADSK, BRK.B, CSCO, EXC, KMR, LOW, VMC, WMT

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Related Links

Earnings Report -- Autodesk
http://news.morningstar.com/all/ViewNews.aspx?article=/BW/20120517006364_univ.xml

Earnings Report -- Wal-Mart
http://news.morningstar.com/all/ViewNews.aspx?article=/BW/20120517005622_univ.xml

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Morningstar Stock Reports and Analyst Notes

Wal-Mart WMT     |     Michael Keara

Wal-Mart reported first-quarter results ahead of consensus estimates, which has shares trading higher and near our $61 fair value estimate. We are not making any changes to our discounted cash flow at this time, since financial results are beginning to track our base-case scenario of gross margin investments and modest comparable stores sales growth. This quarter Wal-Mart was able to cut and then leverage expenses enough to keep operating margins essentially flat. However, we still expect EBIT margins will continue to decline going forward, particularly when the company begins to cycle positive rather than negative comparable store sales in the back half of the year. Moreover, at some point fiscal issues will have to be dealt with in the United States, which will pressure consumer spending patterns, especially for higher-margin discretionary items. But for now, U.S. consumers are spending.

On the plus side, off of last year's negative 0.9% comparison, same-store sales at Wal-Mart U.S. stores came in ahead of consensus at +2.6%, which swung the two-year comp rate from negative 0.3% to positive 1.5% in the first quarter. The company reported increases in average ticket and importantly, customer traffic as well. On the negative side, Wal-Mart still lags leading competitors that continue to post higher comp sales despite much tougher year-ago comparisons. Target reported a 5.3% same-store sales increase but against a +2% comparison, and this morning Dollar Tree DLTR delivered a 5.6% comp against a 7.1% increase last year. Still, the sales acceleration at domestic stores from the prior quarter has shares regaining recent, and in our view unwarranted, market valuation losses stemming from bribery allegations at its Mexican subsidiary. Excluding fuel, Sam's Club reported strong 5.3% comps, and excluding exchange rates, revenues increased about 11% at the International segment.   

Wal-Mart continued price investments to drive the 2.6% comp increase. This moved the gross margin rate down to 24.6%, a 34 basis points decrease from the year-ago period. However, the company was able to generate 33 bps of expense leverage, which kept consolidated operating margins essentially flat at 5.65% compared with 5.66% last year. The company continues to cut costs to levels that can leverage expenses off of just about flat comps, but it appears same-store sales increases in the 2% or higher range will be needed to keep or drive margin expansion. Wal-Mart reported diluted earnings per share of $1.09, which was $0.04 higher than the $1.05 consensus forecast. The consensus mean estimate for Wal-Mart's fiscal second quarter is already at the high end of management's updated $1.13 to $1.18 EPS range. Given recent sales trends and further potential share repurchases, we believe that the higher end of the EPS outlook is more likely probable.

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Berkshire Hathaway BRK.B     |     Greggory Warren, CFA

A quick glance at Berkshire Hathaway's 13-F filing for the first quarter of 2012 revealed more than a handful of moves by the insurer during the quarter. The first transaction of note was Berkshire's purchase of another 10.6 million shares of Wells Fargo WFC, which brings the firm's stake in the bank up to 394.3 million shares (worth $13.5 billion at the end of the first quarter). Wells Fargo has been Warren Buffett's "go to" stock over the last three years, and while we didn't think that the shares had dipped enough during the first quarter to warrant a whole lot of buying activity, the Oracle of Omaha felt differently. Since the start of 2009, Berkshire has added 104.1 million shares of Wells Fargo (equivalent to 36% of its holdings in the bank at the end of 2008) to its investment portfolio. Buffett was also going back into the market to pick up shares of Wal-Mart WMT, and that was even before news broke last month that the firm's largest foreign subsidiary, Wal-Mart de Mexico, had been accused of years of widespread bribery in that country. We had recently speculated that Wal-Mart was one of only a few names we could envision Buffett buying (following his comments early last week that he had purchased two stocks for Berkshire's account in the days before and after the annual meeting, indicating that these were additions to positions the company already owns), so we weren't too far off the mark. The question, though, is whether Buffett was adding to the 7.7 million shares that Berkshire already picked up during the first quarter when the stock took a turn for the worse at the end of April. With the retail giant accounting for less than 4% of Berkshire's total stock holdings at the end of the first quarter, we wouldn't be surprised if Buffett did step up and purchase more shares of Wal-Mart during the current quarter. About the only other transactions we can ascribe to the Oracle of Omaha are the purchase of 490,000 additional shares of IBM IBM, the sale of 9.1 million shares of Kraft Foods KFT, and 3.5 million shares of Procter & Gamble PG, none of which surprise us too much, given the tone of Buffett's more recent comments on both names.

As for the non-Buffett moves, we saw Berkshire pick up another 2.7 million shares of The DIRECTV Group DTV, which at $1.1 billion at the end of the first quarter accounted for less than 2% of Berkshire's reported $75.3 billion stock portfolio. We continue to ascribe this position to Ted Weschler, who was also the likely force behind purchases of DaVita DVA (where he picked up 3.3 million shares) and Liberty Media LMCA (which was increased by 1.3 million shares), as these three firms were top five holdings in his fund. We also believe that he was behind this quarter's new money purchase of Viacom VIAB, which fits in more nicely with his bent toward media and communications names. It's anybody's guess who was behind the 10-million-share investment in General Motors GM, which doesn't really fit in with Weschler's background, nor Todd Combs', who has had more of a penchant toward financial services names. We think the ramping up of Berkshire's position in Bank of New York Mellon BK, which increased in size by 3.8 million shares, was a Combs move, as was the sale of 860,000 shares of Dollar General DG (which had been one of his first additions to the portfolio in the second quarter of last year). While we're not sure if Combs or Weschler initiated the stake in Intel INTC during the third quarter of 2011, Berkshire sold off around one quarter of its stake during the quarter, which makes sense given that the stock is up some 50% from its lows in mid- to late August 2011. As for the remaining transactions, they looked to be more housecleaning related than anything else, with Berkshire moving 1.5 million shares of Comdisco CDCO and 1.2 million shares of Verisk Analytics VRSK off the books. There were also very minor shares changes in US Bancorp USB and Ingersoll-Rand IR during the quarter.

It should also be noted that Berkshire's 13-F filing this quarter did include the "confidential information has been omitted from the Form 13-F and filed separately with the Commission" phrase, which is usually a sign that Berkshire has received permission from the SEC to keep a holding secret while it builds up a stake, so it's anybody's guess what else Buffett, Combs, and/or Weschler were up to during the quarter. As is the case in most periods, Berkshire's equity portfolio remains concentrated among its top 10 holdings, which accounted for close to 90% of the total dollar value (of $73.5 billion) of its reported stock portfolio at the end of the first quarter. We intend to publish a much deeper look at Berkshire's holdings as part of our Ultimate Stock-Pickers content next week.

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Facebook FB     |     Rick Summer, CFA, CPA

Facebook is building the foundation to revolutionize online advertising. However, lack of near-term visibility and cloudy advertising metrics may temporarily stall revenue and profit growth.

Facebook's massive base and engagement arguably create advertising opportunities that capture reach and target based on specific criteria. Growth in Facebook's user base across geographies has been impressive. Monthly active users were 901 million at the end of the first quarter, 33% more than reported in the year-ago period. These users are logging into Facebook at least once a month, communicating with friends, posting pictures, and using applications. We believe hundreds of millions of users face switching costs that keep them from leaving Facebook. People are unlikely to leave unless they can take their network of friends, content, and applications with them.

The company's growth in mobile usage has been equally impressive, particularly considering that Facebook was very slow to market with a downloadable application. The firm had nearly 500 million mobile monthly active users as of the first quarter of this year. Although the company has not actively developed its mobile advertising capabilities, we expect a substantial bulk of mobile advertising dollars to flow to Facebook within the next couple of years.

Facebook's platform capabilities provide important assets for growth and competitive advantage, a key point to our investment thesis. As developers use Facebook services such as login credentials related demographic information, the platform partners share data with Facebook. We believe this symbiotic relationship adds a great deal of value to Facebook's partners while deepening the user data that Facebook owns. We expect the company to offer an advertising network that may someday provide a similar audience reach to broadcast television. While this capability doesn't exist today, we believe Facebook data can eventually accelerate the transition of advertising spending from offline to online.

We believe optimism is warranted, but the market may not appreciate several near-term challenges facing the company. First, there is a lack of best practices for advertisers to measure the return on their advertising dollar. In our research, advertisers and agencies have commented that the lack of standards or clear return on investment in running social advertising campaigns presents a challenge, although the massive user base is too compelling to ignore. However, if agencies and advertisers are not able to develop acceptable tools for measurement, growth in social advertising may stall and the value of Facebook will be as generic as any other website that drives traffic. Although we expect the industry to successfully evolve in the way that the search industry did nearly a decade ago, the challenge with measuring ROI in social advertising is admittedly greater. We expect the company to translate its immense user base and competitive advantages into massive growth in revenue and cash flows over the long run, but the ability to further monetize current users represents a significant hurdle that must be overcome.

Facebook has patiently built a company that is already driving excess returns on capital and fantastic profitability. While we expect growth rates to be highly variable, the opportunity for Facebook is enormous. By being disciplined and prudently investing in its core assets, this wide-moat company is set to disrupt the advertising world, in our opinion.

Concerning the company's valuation, we value Facebook at $32 per share, representing an enterprise value of approximately $71 billion. Our valuation represents a multiple of 59 and 71 times our 2012 earnings per share and free cash flow estimates, respectively.

In modeling the company, we forecast 10 years of financial statements. Admittedly, there is a great deal of uncertainty about the ultimate growth trajectory and profit profile of the company, but the exercise is important to us for several reasons. First, we believe the company will reach its structural maturity within 10 years, whereby it has normalized operating margins and cash flow yields. Second, understanding the size of the revenue opportunity at the end of our explicit forecast period helps quantify our level of optimism about the firm's revenue potential. While we would not feel comfortable about our level of precision in forecasting the absolute level of revenue in three years, we do think our 10-year forecast results in a fair representation within a range of possible outcomes.

The key value drivers in our model include revenue of $40 billion in 2021, operating margins of 32% in 2021, and forward returns on invested capital of more than 50%. Facebook's revenue would still be meaningfully lower than Google's, according to our forecasts, but profitability metrics would be similar. We expect Facebook to have to continue investing in sales and marketing, which would drive additional operating expenses. Additionally, the company will have to increase its revenue sharing with third parties for an advertising network, and we would also expect local and payment businesses to have higher cost structures that the existing business.

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Exelon EXC     |     Mark Barnett

The PJM Interconnection grid operator for the U.S. Mid-Atlantic will release results May 18 from its 2015-16 Reliability Pricing Model (RPM) auction that sets capacity payments for power generators in the region. Many of the utilities we cover have significant earnings exposure to capacity pricing. GenOn Energy GEN has the most exposure, with 63% of our forecast 2015 EBITDA coming from PJM capacity revenues.

We continue to believe that auction results will reflect the expected closure of significant coal capacity, driving strong pricing in most regions. Since last year's 2014-15 capacity auction, the EPA has finalized utility MATS (Mercury and Air Toxics Standards) and CSAPR (currently in legal limbo). Other regulations addressing cooling water, ozone standards, and coal ash also could impact 2015-16. MATS is the primary concern, but CSAPR and 316(b) cooling water stand to be costly for uncontrolled generators. Other bullish factors include state environmental rules such as New Jersey's High Energy Demand Days (HEDD) rule, 10.7 GW of deactivation requests since last May, and a 10%-14% increase in new-generation floor price.

Offsetting those bullish factors are a 1% cut in expected 2015-16 peak demand, several large transmission projects set to come on line by 2015, an increase in demand response and energy efficiency bids, state-sponsored generation that may be allowed to bid below the new-generation floor price, and the entrance of American Electric Power's AEP 8.9 GW Ohio fleet for the first time.

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Kinder Morgan Management KMR     |     Jason Stevens

El Paso Pipeline Partners EPB announced Friday that it will acquire the 14% of Colorado Interstate Gas pipeline it does not currently own and 100% of the Cheyenne Plains pipeline for $635 million, in El Paso's EP final asset drop-down. The transaction is expected to close May 24, simultaneous with the closing of the Kinder Morgan KMI-El Paso merger. Based on prices paid for previous stakes in CIG, we allocated approximately $170 million of the purchase price to CIG, placing a value of $465 million on Cheyenne Plains. This transaction does not affect our fair value estimates, as it is broadly in line with our expectations. Post acquisition, we continue to expect Kinder Morgan will use EPB as a drop-down vehicle, but also imagine a shift toward organic growth under Kinder's management.

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