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 Cisco
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 Cisco 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 Cisco's earnings and free cash flow history.
Source: S&P Capital IQ.
Over the past five years, Cisco's earnings have remained pretty stable.
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 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 Ratio |
Return on Equity |
5-Year Average Return on Equity |
|---|---|---|---|
| Cisco | 36% | 14% | 20% |
|
Juniper Networks |
14% | 8% | 2% |
|
F5 Networks |
0% | 23% | 15% |
|
Brocade Communications |
39% | 2% | 5% |
Source: S&P Capital IQ.
Cisco produces moderately high returns on equity while employing a fairly average amount of debt.
3. Management
CEO John Chambers has been at the job since 1995 and with the company since 1991. Before that, he worked at a variety of other tech companies, including IBM.
4. Business
While Buffett might be a bit hesitant to invest in a tech-focused company such as Cisco, Internet routers aren't particularly susceptible to disruption, so far as IT goes.
The Foolish conclusion
Regardless of whether Buffett would ever buy Cisco, we've learned that, although it doesn't operate in Buffett's favorite sector, it exhibits some of the characteristics of a quintessential Buffett investment: consistent earnings, reasonably high returns on equity with limited debt, and tenured management. To stay up to speed on the top news and analysis on Cisco or any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
