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 Force Protection (Nasdaq: FRPT ) -- 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 Force Protection 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 Force Protection'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, Force Protection's earnings been somewhat volatile, though the company has generally remained profitable over the period.
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)
|
|
Force Protection
|
0%
|
(2%)
|
11%
|
|
Ceradyne (Nasdaq: CRDN )
|
12%
|
9%
|
22%
|
|
iRobot (Nasdaq: IRBT )
|
0%
|
16%
|
7%
|
|
AeroVironment (Nasdaq: AVAV )
|
0%
|
10%
|
15%
|
Source: Capital IQ, a division of Standard & Poor's.
Force Protection tends to generate modest to moderate returns on equity while employing no debt.
3. Management
CEO Michael Moody has been at the job since 2008. Prior to that, he worked in private equity-like settings: business reorganizations, acquisitions, and corporate financial advice.
4. Business
Producing ballistic-protected vehicles for the military requires a fair bit of research and development spending and can be a bit susceptible to technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever purchase shares of Force Protection, we've learned that, while the company has fairly tenured management, it doesn't particularly exhibit the other quintessential characteristics of a Buffett investment: consistent earnings, high returns on equity with limited debt, and a technologically simple industry, and a fairly straightforward industry.
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