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 PriceSmart (NAS: PSMT) , 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 PriceSmart 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 PriceSmart's earnings and free cash flow history:
Source: S&P Capital IQ.
PriceSmart's earnings have grown considerably over the past few years.
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.
For a retailer, PriceSmart generates a fairly high return on equity -- 17% over the past year, 14% on average over the past five years -- while employing a modest debt-to-equity ratio of 20%.
CEO Jose Luis Laparte has only been at the job since 2010. He worked at Wal-Mart in Mexico before coming to PriceSmart as a consultant in 2003.
General retail isn't particularly susceptible to technological disruption.
The Foolish conclusion
So is PriceSmart a Buffett stock? It could very well be. The company exhibits many of the quintessential characteristics of a Buffett investment: consistent or growing earnings, high returns on equity with limited debt, and a straightforward business, though it's possible Buffett would want to see how things go under its new CEO.
If you're interested in some other Buffett-esque stock ideas that have big international growth prospects, check out "3 American Companies Set to Dominate the World." 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 PriceSmart. 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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