As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands track his investments and try to glean what they can from his thinking processes.
While we can't know for sure whether Buffett is about to buy Research In Motion (NAS: RIMM) -- 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 Research In Motion 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 Research In Motion'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.
Earnings and free cash flow have grown dramatically for Research In Motion 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 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)
Research In Motion
Nokia (NYS: NOK)
Apple (NAS: AAPL)
Motorola Mobility (NYS: MMI)
Source: Capital IQ, a division of Standard & Poor's.
Research In Motion generates an enormous return on equity while employing no debt.
Research In Motion is run by co-chairmen and co-CEOs James Balsillie, who's been at the job since 1992, and Michael Lazaridis, who was one of the company's co-founders.
The smartphone market is notoriously susceptible to technological and market disruption. Research In Motion, which once disrupted Palm, now finds itself struggling to maintain market share against Google's (NAS: GOOG) Android platform and Apple's iPhone. As of July, Google had 42% smartphone market share, up more than 5 percentage points since April. Apple rose 1 point to 27%, but Research In Motion's share slumped 4 points to less than 22%.
The Foolish conclusion
Though it's unlikely Buffett would purchase shares of Research In Motion, because the industry is so subject to technological disruption, we've learned that for the time being, the company does exhibit some Buffett-esque economics to its business: consistent or growing earnings and high returns on equity with limited debt, in addition to tenured management.
If you'd like to stay up to speed on the top news and analysis on Research In Motion or any other stock, simply click here to 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 thisarticle was published Ilan Moscovitzowns shares of Google and Apple.You can follow him on Twitter:@TMFDada. The Motley Fool owns shares of Apple, Google, and Research In Motion.Motley Fool newsletter serviceshave recommended buying shares of Google and Apple.Motley Fool newsletter serviceshave recommended creating a bull call spread position in Apple. 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.