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 Kronos Worldwide (NYS: KRO) -- 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.
Consistent earnings power.
Good returns on equity with limited or no debt.
Management in place.
Simple, non-techno-mumbo-jumbo businesses.
Does Kronos 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 Kronos' 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.
Over at least the past five years, Kronos' earnings have been fairly volatile, though 2010 and the company's most recent quarterly earnings have been strong.
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)
PolyOne (NYS: POL)
A. Schulman (NAS: SHLM)
Titanium Metals (NYS: TIE)
Source: Capital IQ, a division of Standard & Poor's.
Like many of its peers, Kronos' volatile return on equity is currently strong. The company carries a moderate debt-to-equity ratio.
CEO Steven Watson has been at the job since 2009 and has been CEO of Valhi (NYS: VHI) , Kronos' parent company, since 2002. Prior to that, he was CEO of Titanium Metals and held positions at Valhi and Valhi's parent, Contran.
Kronos' chemicals, such as titanium dioxide (for pigments), aren't particularly susceptible to rapid technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy Kronos, we've learned that while the company has tenured management and operates in a straightforward industry, it doesn't particularly exhibit som e of the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt.
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At the time thisarticle 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 Titanium Metals. 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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