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 Sprint Nextel (NYS: S) -- 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:
Consistent earnings power.
Good returns on equity with limited or no debt.
Management in place.
Simple, non-techno-mumbo-jumbo businesses.
Does Sprint meet Buffett's standards?
1. Earnings powerBuffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Sprint's earnings and free cash flow history:
Source: S&P Capital IQ.
Sprint tends to generate reasonably consistent free cash flow while consistently posting negative earnings. A big reason for the disparity seems to be capital expenditures lagging far behind depreciation, which could be a sign that the company has been underinvesting in its network. (The huge loss in 2007 was due to an acquisition writedown).
2. Return on equity and debtReturn 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.
Sprint's generates a negative return on equity while employing a debt -to-equity ratio of 177%.
3. ManagementCEO Daniel Hesse has been at the job since 2007. Before that, he'd spent several years at various other telecommunications companies.
4. BusinessDespite its sometime reputation for being made up of stodgy dividend payers, the telco industry is somewhat susceptible to technological disruption. Just look at the difficulties Sprint has encountered keeping up with Verizon and AT&T's networks, or how all of the cell-service providers have increasingly become beholden to handset makers in just a few short years.
The Foolish conclusionSo is Sprint a Buffett stock? Probably not. Although the company has tenured management, it doesn't exhibit the other quintessential characteristics of a Buffett investment: consistent earnings, high returns on equity with limited debt, and a straightforward business. However, if you're looking for stocks to profit from mobile, I invite you to check out "3 Hidden Winners of the iPhone, iPad, and Android Revolution."
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned. 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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