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 3M (NYS: MMM) -- 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. That's what I try to find out in this series, because 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:
Consistent earnings power.
Good returns on equity with limited or no debt.
Management in place.
Simple, non-techno-mumbo-jumbo businesses.
Does 3M 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 3M's earnings history:
Source: S&P Capital IQ.3M has generated consistent profits 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 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
5-Year Average Return on Equity
General Electric (NYS: GE)
Tyco International (NYS: TYC)
Honeywell (NYS: HON)
Source: S&P Capital IQ.3M has been generating higher returns on equity than its peers over the past five years while employing a fairly modest amount of debt.
CEO George Buckley has been at the job since 2005. Before that, he held managerial positions at other manufacturers like Tyco and Emerson Electric.
Some of 3M's business lines, like commercial graphics and health care, could be susceptible to technological disruption, but the company is diversified and maintains dominant positions in many industries.
The Foolish conclusion
Regardless of whether Buffett would ever buy 3M, we've learned that it exhibits many of the characteristics of a quintessential Buffett investment: stable earnings, high returns on equity with limited debt, tenured management, and straightforward business lines.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter, where he goes by@TMFDada.Motley Fool newsletter serviceshave recommended buying shares of 3M. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't 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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