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 Deckers Outdoor (Nasdaq: DECK ) -- 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 Deckers 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 Deckers' earnings and free cash flow:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over the past five years, Deckers' earnings have grown substantially.
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)
|
| Deckers |
0% |
25% |
24% |
| Under Armour (NYSE: UA ) |
7% |
16% |
17% |
| Crocs (Nasdaq: CROX ) |
1% |
27% |
12% |
| Nike (NYSE: NKE ) |
7% |
22% |
22% |
Source: Capital IQ, a division of Standard & Poor's.
Deckers tends to generate high returns on equity while employing no debt.
3. Management
CEO Angel Martinez has been at the job since 2005. Prior to that, he worked in brand building at Keen Footwear and Reebok.
4. Business
Footwear isn't particularly susceptible to wholesale technological disruption, though Buffett might be wary of businesses that rely heavily on potentially fickle consumer tastes.
The Foolish conclusion
Whether or not Buffett would buy shares of Deckers, we've learned that while he might approach Deckers' products with some caution due to its reliance on consumer appeal, the company exhibits many of the characteristics of a quintessential Buffett investment: consistent or growing returns on equity, high returns on equity with limited debt, tenured management, and a straightforward business.
If you'd like to stay up-to-speed on the top news and analysis on Deckers or any other stock, add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.
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