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 Pfizer (NYS: PFE) -- 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 Pfizer 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 Pfizer's earnings and free cash flow history:
Source: S&P Capital IQ.
Source: S&P Capital IQ.
Over the past several years, Pfizer's earnings and free cash flow have held fairly steady.
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.
Pfizer generates a moderately low return on equity -- 10% over the past year, 11% on average over the past five years -- while employing a moderate 47% debt-to-equity ratio.
CEO Ian Reed has been at the job only since December 2010, though he's worked at Pfizer since 1978 in a number of different roles.
Diversified pharmaceuticals require constant research and development, and pipeline difficulties are a threat, but the industry isn't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
So is Pfizer a Buffett stock? Probably not. Although the company has generated consistent earnings over recent years and operates in an industry reasonably safe from technological disruption, it doesn't particularly exhibit the other quintessential characteristics of a Buffett investment: high returns on equity with limited debt and tenured management. However, if you'd like to stay up to speed on Pfizer's progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.Motley Fool newsletter serviceshave recommended buying shares of Pfizer. The Motley Fool has adisclosure policy. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. Try any of our Foolish newsletter servicesfree for 30 days.
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