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 Crocs (Nasdaq: CROX ) -- 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 Crocs 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 Crocs' 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, Crocs' earnings and free cash flow have been fairly volatile as sales fell in 2008 and 2009 before beginning to rebound in 2010.
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
|Nike (NYSE: NKE )||7%||22%||22%|
|Deckers Outdoor (Nasdaq: DECK )||0%||25%||23%|
|Under Armour (NYSE: UA )||7%||16%||18%|
Source: Capital IQ, a division of Standard & Poor's.
Crocs tends to generate high returns on equity while employing almost no debt.
CEO John McCarvel has been at the job since 2010. Prior to that, he held a few other jobs at the company, including COO, and worked in sales and marketing for companies including Flextronics and Micron.
Shoes aren't particularly susceptible to wholesale technological disruption, though Buffett would approach any relatively new consumer goods trend critically.
The Foolish conclusion
Whether or not Buffett would ever purchase shares of Crocs, we've learned that the company operates in a fairly straightforward industry and generates high returns on equity with limited debt, though it doesn't particularly exhibit consistent earnings.
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