Is Akamai 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 Akamai (NAS: AKAM) -- 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 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 Akamai 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 Akamai's earnings and free cash flow history:

anImage

Source: S&P Capital IQ.

Akamai' earnings have steadily grown over the past several 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-to-equity ratio, 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

Akamai0%9%9%
Level 3 Communications708%(160%)(161%)
Limelight Networks1%(11%)(20%)
Internap Network30%(3%)(14%)

Source: S&P Capital IQ.

Of these Internet delivery providers, only Akamai is profitable, though it generates moderately low returns on equity. (Level 3 is free cash flow positive and growing revenue quickly.)

3. Management
CEO Paul L. Sagan has been at the job since 2005. Prior to that, he was the company's COO and has worked at media companies like Time Warner and Time New Media.

4. Business
In the grand scheme of things, Internet content delivery is somewhat susceptible to technological disruption, though it's a reasonably reliable business so far as other tech industries are concerned.

The Foolish conclusion
So, is Akamai a Buffett stock? Probably not. Even though the company produces consistently growing earnings and has tenured management, it doesn't particularly generate high returns on equity, and Buffett would likely avoid investing in an Internet service provider. However, if you're interested in a stock that our top analysts and chief investment officer picked to beat the market, you can check out The Motley Fool's Top Stock for 2012. I invite you to download this special report for a limited time by clicking here - it's free.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned.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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