Is Empire District a Buffett Stock?
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 Empire District Electric (NYS: EDE) -- 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:
Consistent earnings power.
Good returns on equity with limited or no debt.
Management in place.
Simple, non-techno-mumbo-jumbo businesses.
Does Empire District 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 Empire District's earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Empire District maintained steady earnings over the past five years, though that could change in the near term as a result of the devastating tornado that tore through Joplin, Missouri, where the utility is based. Free cash flow has been negative due to major capital investments.
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.
Return on Equity (LTM)
Return on Equity (5-Year Average)
Great Plains Energy (NYS: GXP)
Westar Energy (NYS: WR)
PNM Resources (NYS: PNM)
Source: Capital IQ, a division of Standard & Poor's.
Historically, Empire District has produced a moderate return on equity in-line with its peers' while employing a moderate amount of debt.
CEO Bradley Beecher took the job about two months ago, when the previous chief retired. Beecher held various other jobs for decades at Empire District, including Chief Operating Officer.
Electric utilities aren't particularly susceptible to wholesale technological disruption -- at least not in the steam, hydro, coal, and natural gas areas Empire Electric focuses on.
The Foolish conclusion
Regardless of whether Buffett would ever buy Empire District, we've learned that the company exhibits some of the quintessential characteristics of a Buffett investment: consistent earnings, tenured management, and a straightforward industry. It's possible Buffett would watch the company to see how things go under the new CEO and if the company can generate higher returns on equity.
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At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any companies mentioned.You can follow him on Twitter@TMFDada. 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.
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