As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands track his investments and try to glean what they can from his thinking processes.
While we can't know for sure whether Buffett is about to buy Zhongpin
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 Zhongpin 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 Zhongpin’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.
Though it’s only recently turned free-cash-flow positive, Zhongpin has grown its earnings significantly over the past five years.
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) |
|---|---|---|---|
| Zhongpin | 68% | 17% | 17% |
|
AgFeed Industries |
58% | (42%) | 12% |
|
Hormel Foods |
23% | 19% | 16% |
|
Smithfield Foods |
60% | 17% | 4% |
Source: Capital IQ, a division of Standard & Poor's.
Zhongpin tends to generate moderately high returns on equity while employing a moderate amount of debt.
3. Management
Zhu Xianfu founded Zhongpin in 1993 and been CEO since 2006.
4. Business
Meat processing and distribution aren’t particularly susceptible to technological disruption.
The Foolish conclusion
Whether or not Buffett would buy shares of Zhongpin, we’ve learned that it exhibits some of the characteristics of a quintessential Buffett investment: consistent or growing earnings, high returns on equity with fairly limited debt, tenured management, and a straightforward industry.
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