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 Intel (Nasdaq: INTC ) -- he hasn't specifically mentioned anything about it to me -- he's left us some clues as to whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.
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 Intel 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 Intel'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.
Source: Capital IQ, a division of Standard & Poor's. Free is adjusted based on author's calculations.
Intel consistently generates free cash flow and earnings, though their levels can fluctuate significantly from year to year based on market and economic conditions.
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 put them in context:
|
Company
|
Debt-to-Equity Ratio
|
Return on Equity (LTM)
|
Return on Equity
(5-Year Average)
|
|
Intel
|
5%
|
22%
|
16%
|
|
Advanced Micro Devices (NYSE: AMD )
|
343%
|
914%
|
(24%)
|
|
Texas Instruments (NYSE: TXN )
|
0%
|
28%
|
20%
|
|
National Semiconductor (NYSE: NSM )
|
300%
|
69%
|
37%
|
|
Micron (Nasdaq: MU )
|
31%
|
24%
|
(10%)
|
Source: Capital IQ, a division of Standard & Poor's. LTM = last 12 months.
Among this pack, Intel and Texas Instruments are the only companies that seem to consistently generate high returns on equity with little or no debt.
3. Management
Intel's CEO, Paul Otellini, has been at the job since 2005 and has been with Intel for decades.
4. Business
While Intel has the scale to remain a technology leader at a lower cost than its rivals, the rate of technological change is one that would more likely than not disinterest Buffett.
The Foolish conclusion
Whether or not Buffett would ever invest in Intel, we've learned that, despite being a high-tech company, it exhibits many characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and a long tenured CEO.
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