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 SodaStream International
In his most 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 SodaStream 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 SodaStream’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 the past four years, SodaStream has grown its earnings dramatically. (The drop-off in free cash flow in 2010 was due in large part to increasing inventory).
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.
|
Company |
Debt-to-Equity |
Return on Equity (LTM) |
Return on Equity (5-year average) |
|---|---|---|---|
|
SodaStream International |
6% |
16% |
14% |
|
The Coca-Cola |
80% |
42% |
32% |
|
PepsiCo |
115% |
27% |
36% |
|
Green Mountain Coffee Roasters |
100% |
13% |
15% |
Source: Capital IQ, a division of Standard & Poor's.
SodaStream has been producing reasonable returns on equity. It employs almost no debt.
3. Management
CEO Daniel Birnbaum has been at the job since 2007.
4. Business
SodaStream is attempting to disrupt the soda industry. Its model is not a surefire bet, though it seems to be going well so far.
The Foolish conclusion
Regardless of whether Buffett would ever buy SodaStream, we've learned that it exhibits some of characteristics of a quintessential Buffett investment: consistent or growing earnings, limited debt, and tenured management. Buffett might like to see the business model prove itself out for a longer period of time, though it does seem to bear some resemblance to one of his best investments ever, Gillette, selling low-margin machines in order to profit on high-margin consumables.
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