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 Xerox (NYS: XRX) , 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 Xerox 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 Xerox's earnings and free cash flow history:
Source: S&P Capital IQ.
Xerox's earnings took a beating during the recession as sales fell. But it managed to remain profitable and earnings have rebounded.
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.
Xerox generates a moderately low return on equity -- 11% over the past year, 9% on average over the past five years -- while employing a moderate 70% debt-to-equity ratio.
CEO Ursula Burns has been at the job since 2009. She began working for the company as a summer intern in 1980 and then rose up through various positions in engineering and marketing.
Although Buffett would probably be a bit reluctant to invest in an IT hardware producer, almost half of Xerox's business is in services. Buffett recently showed that he could set aside his technophobia by buying shares of IBM for its high-moat services business.
The Foolish conclusion
So is Xerox a Buffett stock? Probably not. Although the company did manage to remain profitable during the recession, it doesn't particularly exhibit some of the other quintessential characteristics of a Buffett investment: high returns on equity with limited debt and a straightforward business. However, if you're interested in a stock that our top analysts and chief investment officer picked to beat the market, you can check out The Motley Fool's Top Stock for 2012. I invite you to download this special report for a limited time by clicking here - it's free.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.Motley Fool newsletter serviceshave recommended buying shares of Xerox Holdings. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not 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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