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 Nokia (NYS: NOK) -- 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 Nokia 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 Nokia's earnings and free cash flow history:
Source: S&P Capital IQ.
Over the past five years, Nokia's earnings and free cash flow have plunged along with its handset market share.
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
Motorola Mobility (NYS: MMI)
Research In Motion (NAS: RIMM)
Apple (NAS: AAPL)
Source: S&P Capital IQ.
Like the rest of the tech sector, handset makers tend to maintain clean balance sheets, so they have the flexibility to cope with technological change. Unfortunately, Nokia and Motorola Mobility haven't been able to do so very successfully yet, though we just found out that Google's bid to buy Motorola Mobility is likely to be approved. Even Research In Motion's capital efficiency, while still strong, has declined as Apple continues to grab market share from its competitors.
CEO Stephen Elop has been at the job since only 2010. Before that, he was at various tech companies including Microsoft, Juniper, and Adobe.
As the past several years -- which have shown the rise of the Palm Pilot, then the BlackBerry, and then the iPhone and Android devices -- have shown, the handset market is extraordinarily susceptible to technological disruption.
The Foolish conclusion
So is Nokia a Buffett stock? Probably not, as it doesn't exhibit the characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity, tenured management, and a technologically straightforward business. However, if you're looking for stocks to profit from the latest mobile trends, I invite you to check out "3 Hidden Winners of the iPhone, iPad, and Android Revolution."
At the time thisarticle was published Ilan Moscovitzowns shares of Apple and Google.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.
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