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 Genuine Parts (NYS: GPC) -- 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 Genuine Parts 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 Genuine Parts' earnings and free cash flow history:
Source: S&P Capital IQ.
Despite the economic downturn that hit the auto industry particularly hard, Genuine Parts' earnings and free cash flow have remained remarkably consistent over the past several years. Aftermarket retail has been one of the brighter spots in the auto industry as cash-strapped consumers have been delaying new auto purchases.
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.
Genuine Parts generates a fairly strong return on equity -- 20% over the past year, 18% on average over the past five years -- while utilizing a modest debt-to-equity ratio of 18%.
CEO Thomas Gallagher has been at the job since 2004. Prior to that, he'd held other positions at the company for a number of years.
Auto parts distribution isn't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
So is Genuine Parts a Buffett stock? Perhaps. The company exhibits a number of the quintessential characteristics of a Buffett investment: consistent earnings, high returns on equity with limited debt, tenured management, and a technologically straightforward business.
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At the time thisarticle was published Ilan Moscovitz doesn't own shares of any companies mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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