Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy Corning
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size 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 Corning 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 Corning's earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over at least the past five years, Corning's profits fluctuated in large part with demand for its glass. Business appears to be on an upswing and management is upbeat, for what it's worth.
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 actually 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.
Let's examine Corning alongside some of its domestic competitors, with the caveat that none of these companies focuses specifically on the same products that Corning manufactures.
|
Company |
Debt-to-Equity Ratio |
Return on Equity (LTM) |
Return on Equity (5-year average) |
|---|---|---|---|
|
Corning |
11% |
20% |
25% |
|
3M |
41% |
32% |
33% |
|
Tyco Electronics |
36% |
13% |
(2%) |
|
Becton, Dickinson |
33% |
24% |
23% |
Source: Capital IQ, a division of Standard & Poor's.
Corning exhibits a high return on equity while employing minimal debt -- one hallmark of a strong competitive advantage.
3. Management
Corning's chairman and CEO, Wendell Weeks, has only been at the jobs since 2007 and 2005, respectively. However, he has been with the company in other capacities since 1983.
4. Business
The specialty glass business involves investing in new technology to keep ahead of competitors -- Corning may be a successful player in this industry, but the industry isn't obviously a Buffettesque play (though we should note that he does own shares of medical device maker Becton, Dickinson, mentioned above).
The Foolish conclusion
Regardless of whether Buffett ever buys Corning, we've learned which characteristics of a quintessential Buffett investment it displays: signs of a competitive advantage and tenured leadership. It's possible he would prefer to see a longer track record for Corning's CEO in his new position and a little more earnings stability, and more predictable technology.
