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 Ford (NYS: F) -- 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. 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 Ford 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 Ford's earnings and free cash flow history:
Source: S&P Capital IQ.
Ford's earnings have been susceptible to the economic downturn, though the company has managed to rebound fairly dramatically.
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 Motors (NYS: GM)
Toyota (NYS: TM)
Honda (NYS: HMC)
Source: S&P Capital IQ.
*Negative equity one or more years.
Ford's returns on equity are absurdly high, but that's only because the company doesn't have a great deal of equity.
CEO Alan Mullaly has been at the job since 2006 and is frequently given much of the credit for Ford's turnaround. Before working at Ford, he worked for a number of years at Boeing, where he helped to turn around that company.
Automobiles require constant reinvestment in research and development, though they're not particularly susceptible to wholesale technological disruption in the same way as some high-tech industries.
The Foolish conclusion
Regardless of whether Buffett would ever buy Ford, we've learned that, although it carries a great deal of debt, Ford does exhibit some of the other characteristics of a quintessential Buffett investment: tenured management and a straightforward industry, and, increasingly, consistent earnings. To stay up to speed on Ford's turnaround, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
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. The Motley Fool owns shares of Ford.Motley Fool newsletter serviceshave recommended buying shares of General Motors and Ford. 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.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.