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 Manitowoc (NYSE: MTW ) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.
Writing in a 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 Manitowoc 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 Manitowoc's earnings and free cash flow history:
Source: S&P Capital IQ.
Like much of the construction equipment industry, Manitowoc took major losses in 2008 and 2009, and results remain rocky.
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.
|
Company
|
Debt-to-Equity Ratio
|
Return on Equity
|
5-Year Average Return on Equity
|
| Manitowoc |
446% |
(10%) |
(4%) |
| Caterpillar (NYSE: CAT ) |
233% |
35% |
35% |
| Terex (NYSE: TEX ) |
102% |
0% |
3% |
| Deere (NYSE: DE ) |
391% |
43% |
29% |
Source: S&P Capital IQ.
Manitowoc's industry is notoriously capital-intensive -- hence the high debt-to-equity ratios that are common to all. The cyclicality of the industry combined with this amount of leverage can be a dangerous combination, as illustrated by the difficulty Manitowoc and Terex have had maintaining profitability during the bust; Terex paid more in interest than it earned in operating income over the past year, while Manitowoc barely earned more than its interest expenses. Even Caterpillar and Deere, which are doing much better, have lower returns on capital than the return-on-equity numbers would suggest because of their high debt levels.
3. Management
CEO Glen Tellock has been at the job since 2007. Before that, he served in other roles at the company for a number of years.
4. Business
Construction and food-service equipment aren't particularly prone to technical disruption -- we're not talking astro-nanorobotics here.
The Foolish conclusion
So is Manitowoc a Buffett stock? Probably not. The company and its industry aren't particularly conducive to earnings consistency or high returns on equity with limited debt, even though it's not particularly high-tech and Manitowoc has tenured management. However, to stay up to speed on Manitowoc's progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
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