As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
We can't know for sure whether Buffett is about to buy hhgregg (NYSE: HGG ) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal 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 hhgregg 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 hhgregg's earnings and free cash flow history.
hhgregg’s earnings have grown steadily over the past five years. (The free cash flow shortfall in 2010 was related to increased 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 (4-Year Average)
|
| hhgregg |
0% |
17% |
29% |
| Lowe's (NYSE: LOW ) |
38% |
11% |
13% |
| Best Buy (NYSE: BBY ) |
31% |
19% |
22% |
| Sears Holdings (Nasdaq: SHLD ) |
44% |
0% |
3% |
Source: Capital IQ, a division of Standard & Poor's.
hhgregg generates a high return on equity without employing any debt.
3. Management
CEO Dennis L. May has been at the job since 2009. Before that, he'd held other top jobs at hhgregg. He's joined by Executive Chairman Jerry Throgmartin, who's been at the company since 1975.
4. Business
Consumer retail isn't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
Whether or not Buffett would buy shares of hhgregg, we've learned that the company exhibits some of the characteristics of a quintessential Buffett investment: consistent or growing earnings, high returns on equity with limited debt, tenured management, and a straightforward business.
If you'd like to stay up to speed on the top news and analysis on hhgregg or any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
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