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 Boeing (NYSE: BA ) -- 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 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 Boeing 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 Boeing's earnings and free cash flow history:
Source: S&P Capital IQ.
Over the past five years, Boeing's earnings have fluctuated a bit more than its peers' earnings with economic volatility, though the company has managed to remain profitable, and earnings have climbed back to their pre-recession levels.
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
|
| Boeing |
343% |
124% |
125% |
| United Technologies (NYSE: UTX ) |
44% |
23% |
23% |
| Honeywell (NYSE: HON ) |
69% |
17% |
19% |
| Lockheed Martin (NYSE: LMT ) |
645% |
113% |
71% |
Source: S&P Capital IQ.
Barriers to entry in the capital- and expertise-intensive aviation industry are intense. Hence, the industry carries a bit of debt but is also very profitable. Boeing and Lockheed Martin produce extraordinarily high returns on equity, though part of that is due to their enormous debt-to-equity ratios. (Their returns on capital are more modest but still impressive -- 22% and 31%, respectively). UTX and Honeywell generate high returns on equity while employing limited debt.
3. Management
CEO James McNerney has been at the job since 2005, after spending years at industrial conglomerates 3M and General Electric.
4. Business
While aviation requires constant research and development, it hasn't been particularly subject to technological disruption for some time.
The Foolish conclusion
So is Boeing a Buffett stock? Perhaps. While its earnings can be somewhat volatile, and the company employs considerable leverage, it does exhibit many of the characteristics of a quintessential Buffett investment: high returns on equity, tenured management, and a technologically straightforward business. To stay up to speed on the top news and analysis on Boeing 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.
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