Is Bristol-Myers Squibb a Buffett Stock?

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

While we can't know for sure whether Buffett is about to buy Bristol-Myers Squibb (NYS: BMY) -- 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 Bristol-Myers Squibb 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 Bristol-Myers Squibb'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.

With the exception of 2008 and 2009, when the company enjoyed an earnings surge from operations that have since been discontinued, earnings have been fairly steady over the past five years.

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)

Bristol-Myers Squibb34%30%26%
Pfizer (NYS: PFE) 47%10%12%
Abbott Labs (NYS: ABT) 69%22%22%
Eli Lilly (NYS: LLY) 47%39%26%

Source: Capital IQ, a division of Standard & Poor's.

Bristol-Myers Squibb generates high returns on equity while employing moderately low amounts of debt.

3. Management
CEO Lamberto Andreotti has been at the job since 2009. Prior to that, he was the COO for a couple of years after having run its Worldwide division for a number of years.

4. Business
The pharmaceutical industry is somewhat susceptible to technological disruption, though large pharmas like Bristol-Myers have large product portfolios that help to spread out their risk.

The Foolish conclusion
Whether or not Buffett would buy shares of Bristol-Myers Squibb today, we've learned that it exhibits some of the characteristics of a quintessential Buffett investment: consistent or growing earnings, high returns on equity with limited debt, and a fairly technologically straightforward industry.

If you'd like to stay up to speed on the top news and analysis on Bristol-Myers Squibb or any other stock, 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 Abbott Laboratories.Motley Fool newsletter serviceshave recommended buying shares of Pfizer and Abbott Laboratories. 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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