Is Petrobras 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.

We can't know for sure whether Buffett is about to buy Petrobras (NYS: PBR) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.

Writing in a 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 Petrobras 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 Petrobras's earnings and free cash flow history:

anImage

Source: S&P Capital IQ.

Despite the economic downturn, Petrobras managed to do a pretty good job maintaining its earnings. The free cash flow shortfall was largely due to spending on enormous capital projects.

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 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 Ratio

Return on Equity

5-Year Average Return on Equity

Petroleo Brasileiro44%12%25%
Eni52%13%19%
ExxonMobil10%27%30%
BP41%24%18%

Source: S&P Capital IQ.

Historically, Petrobras has generated decent returns on equity. It employs industry-average leverage.

3. Management
CEO Jose Azevado has been at the job since 2005. Prior to coming to Petrobras, he was an academic specializing in macroeconomics, labor, and finance.

4. Business
Oil and gas exploration and production isn't particularly susceptible to technological disruption, though new technologies are being discovered all the time.

The Foolish conclusion
So is Petrobras a Buffett stock? Perhaps. It generated consistent earnings, has tenured management, and operates in a technologically straightforward industry, though it doesn't particularly exhibit the other characteristic of a quintessential Buffett investment: high returns on equity with limited debt. If you'd like to stay up to speed on Petrobras' progress, simply 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 Petrobras. 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 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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