Is Inergy 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 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 Inergy (NYS: NRGY) -- 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 Inergy 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 Inergy'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.

Inergy's earnings have fluctuated a bit over the past few years, but the company has remained profitable throughout a shaky economy.

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 among 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)

Inergy139%(1%)10%
Ferrellgas (NYS: FGP) 661%(26%)19%
Boardwalk Pipeline (NYS: BWP) 94%7%12%
El Paso Pipeline (NYS: EPB) 188%30%31%

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

Inergy tends to generate moderately low returns on equity with moderate debt. (The discrepancy between positive net income and negative return on equity is because return on equity is based on continuing operations.)

3. Management
Founder and CEO John Sherman has been at the job since 1997. Before that, he worked at Dynegy and co-founded LPG.

4. Business
Natural gas storage and transportation isn't particularly susceptible to technological disruption.

The Foolish conclusion
Regardless of whether Buffett would ever buy Inergy, we've learned that, while it doesn't generate high returns on equity with limited debt, it exhibits some of the other characteristics of a quintessential Buffett investment: tenured management and a straightforward industry.

If you'd like to stay up to speed on the top news and analysis on Inergy 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.Motley Fool newsletter serviceshave recommended buying shares of El Paso Pipeline Partners. 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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