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.
While we can't know for sure whether Buffett is about to buy Walgreen (NYS: WAG) -- 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 Walgreen 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 Walgreen's earnings and free cash flow:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Walgreen has maintained pretty consistent earnings over the past five 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 among 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)
CVS Caremark (NYS: CVS)
Rite Aid (NYS: RAD)
Medco Health (NYS: MHS)
Source: Capital IQ, a division of Standard & Poor's. *Negative equity.
Walgreen tends to generate moderately high returns on equity while employing the least amount of debt among these peers.
CEO Greg Wasson has only been at the job since early 2009, though he's served in other roles with the company for nearly three decades.
Drugstores aren't particularly susceptible to technological disruption.
The Foolish conclusion
Whether or not Buffett would buy shares of Walgreen, we've learned that it exhibits many of the characteristics of a quintessential Buffett investment: consistent earnings, moderately high returns on equity with limited debt, and a straightforward business.
If you'd like to stay up to speed on the top news and analysis on Walgreen or any other stock, 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 Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada. The Motley Fool owns shares of MedcoHealth Solutions.Motley Fool newsletter serviceshave recommended buying shares of MedcoHealth Solutions. 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.