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 American Tower
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 American Tower 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 American Tower‘s earnings and free cash flow:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
American Tower's earnings are up considerably since 2007, largely because of higher revenue and lower depreciation expenses.
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) |
|---|---|---|---|
| American Tower | 158% | 11% | 6% |
|
Crown Castle International |
254% | (1%) | (6%) |
|
SBA Communications |
2,655% | (53%) | (32%) |
Source: Capital IQ, a division of Standard & Poor's.
American Tower tends to generate higher returns on equity than its peers while employing a bit less debt. On an absolute basis, it generates moderate-to-moderately low returns on equity with moderately high amounts of debt.
3. Management
CEO James Taiclet has been at the job since 2003. Before that, he was at Honeywell for a few years, as well as McKinsey and the Air Force.
4. Business
Communications towers aren't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
Whether or not Buffett would buy shares of American Tower, we've learned that although the company doesn't generate high returns on equity with limited debt (at least not on an absolute basis), it does exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings, tenured management, and a straightforward industry.
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