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 Visa (NYSE: V ) -- he hasn't specifically mentioned anything about it to me -- we can discover 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.
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Visa 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 Visa'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 five years, Visa's earnings and free cash flow have grown considerably. (The huge loss in 2007 was due to a lawsuit).
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:
Return on Equity (LTM)
Return on Equity (5-year average)
|MasterCard (NYSE: MA )||0%||43%||26%|
|American Express (NYSE: AXP )||368%||28%||28%|
|Discover Financial (NYSE: DFS )||277%||19%||17%|
Source: Capital IQ, a division of Standard & Poor's.
CEO Joseph Saunders has been at the job since 2007.
Buffett's a big fan of the card industry. He's held shares of American Express for years, and his company recently opened a position in MasterCard, though Buffett himself may not have made the investment.
The Foolish conclusion
Regardless of whether Buffett would ever buy Visa, we've learned that while the company bears some of the characteristics of a quintessential Buffett investment: consistent or growing earnings, limited debt, and a straightforward business. However, it's possible that Buffett would prefer to see higher returns on equity.
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