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 Boston Beer (NYSE: SAM ) -- 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.
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 Boston Beer 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 Boston Beer'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, Boston Beer's earnings have grown considerably.
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)
|
| Boston Beer |
0% |
28% |
19% |
| Molson Coors (NYSE: TAP ) |
25% |
9% |
8% |
| Anheuser-Busch InBev (NYSE: BUD ) |
116% |
18% |
17% |
| Constellation Brands (NYSE: STZ ) |
127% |
22% |
1% |
Source: Capital IQ, a division of Standard & Poor's.
Boston Beer produces a high return on equity while employing no debt.
3. Management
CEO Martin F. Roper has been at the job since 2001 and was formerly the COO since 1997.
4. Business
Beer isn't particularly susceptible to rapid technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy Boston Beer, we've learned that the company exhibits many of the characteristics of a quintessential Buffett investment: consistent or growing earnings, high returns on equity with limited debt, tenured management, and a straightforward industry.
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