Is Mueller Water a Buffett Stock?

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Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.

While we can't know for sure whether Buffett is about to buy Mueller Water (NYS: MWA) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Mueller Water meet Buffett's standards?

1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.

Let's examine Mueller Water's earnings and free cash flow:

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Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.

Mueller Water's earnings have fluctuated somewhat over the past couple of years. The big loss in 2009 was largely due to goodwill impairment charges, but Mueller Water hasn't yet returned to profitability.

2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.

Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Company

Debt-to-Equity

Return on Equity (LTM)

Return on Equity (5-Year Average)

Mueller Water172%(9%)(1%)*
Itron (NAS: ITRI) 36%8%3%
Graco (NYS: GGG) 48%46%46%
Tetra Tech (NAS: TTEK) 13%11%12%

Source: Capital IQ, a division of Standard & Poor's. *Excludes 2009 due to distortion in the ROE figures as a result of the impairment charges mentioned previously.

Mueller Water has tended to generate losses while employing a rather high return on equity

3. Management
CEO Gregory Hyland has been at the job since 2007. He was CEO of Walter Energy (then Walter Industries) for a couple of years before it spun off Mueller Water. He's also worked for Ryder, Tyco International, and Rockwell International.

4. Business
Water infrastructure isn't particularly susceptible to wholesale technological disruption.

The Foolish conclusion
Whether or not Buffett would buy shares of Mueller Water, we've learned that while the company has tenured management and operates in a straightforward industry, it doesn't particularly exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt.

If you'd like to stay up-to-speed on the top news and analysis on Mueller Water or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada. The Motley Fool owns shares of Graco.Motley Fool newsletter serviceshave recommended buying shares of Walter Energy and Mueller Water Products. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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