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 JDS Uniphase (Nasdaq: JDSU ) -- 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 JDS Uniphase 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 JDS Uniphase'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 at least the past five years, JDS Uniphase has had difficulty maintaining positive earnings or free cash flow. (It should be noted that the enormousness of the 2009 loss was due to a goodwill impairment charge rather than to operations.)
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)
|
| JDS Uniphase |
30% |
7% |
(17%) |
| Finisar (Nasdaq: FNSR ) |
6% |
17% |
(53%) |
| IPG Photonics (Nasdaq: IPGP ) |
6% |
27% |
17% |
| Rofin-Sinar (Nasdaq: RSTI ) |
5% |
13% |
11% |
Source: Capital IQ, a division of Standard & Poor's.
JDS has had a history of generating losses, though it’'s swung to a modestly positive return on equity over the past 12 months. It employs a bit more debt than its higher-returning peers, though its leverage is still only moderately low in the grand scheme of things.
3. Management
CEO Tom Waechter has been at the job only since 2009, though he has had experience running other tech companies over the past couple of decades, including Harris Stratex, REMEC, and Spectrian.
4. Business
The underlying communications technology that JDS provides solutions for can be fairly susceptible to technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy JDS Uniphase, we've learned that the company doesn't particularly exhibit some of the characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and a straightforward industry.
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