Is Apple a Buffett Stock?

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 Apple (NAS: AAPL) -- 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 this series, we do just that.

Writing in a 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:

  1. Consistent earnings power.

  2. Good returns on equity with limited or no debt.

  3. Management in place.

  4. Simple, non-techno-mumbo-jumbo businesses.

Does Apple 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 Apple's earnings and free cash flow history:


Source: S&P Capital IQ.

Source: S&P Capital IQ.

Over the past five years, Apple's earnings and free cash flow have grown 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.

Apple generates enormous returns on equity (42% over the past year, 34% on average over the past five years) without employing debt.

3. Management
CEO Tim Cook took over the top spot from Steve Jobs in August. Although he's new to the job, he had been helping to run Apple as chief operating officer for years.

4. Business
Mobile and computer devices are highly susceptible to technological disruption, though over the past several years Apple's consistently been the disrupter, rather than the disrupted.

The Foolish conclusion
So is Apple a Buffett stock? Probably not, but only because of the rapidly changing nature of the consumer-technology industry. It's intriguing to discover that the company exhibits many of the other quintessential characteristics of a Buffett investment: consistent or growing earnings, high returns on equity with limited debt, and tenured management. If you're looking for another fast-growing stock to profit off the iPhone and smartphone revolution, check out "3 Hidden Winners of the iPhone, iPad, and Android Revolution." I invite you to read the Motley Fool's special report on these three stocks for free.

At the time thisarticle was published Ilan Moscovitzowns shares of Apple.You can follow him on Twitter, where he goes by@TMFDada. The Motley Fool owns shares of Apple.Motley Fool newsletter serviceshave recommended buying shares of and creating a bull call spread position in Apple. 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 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.