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 Silver Wheaton (NYSE: SLW ) -- 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 Silver Wheaton 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 Silver Wheaton's earnings and free cash flow history:
Source: S&P Capital IQ.
Silver Wheaton's earnings have soared over the past few years, which have been a boom time for the precious metals industry as prices have soared because of economic uncertainty.
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.
Return on Equity
5-Year Average Return on Equity
|Silvercorp Metals (NYSE: SVM )
|Coeur d'Alene Mines (NYSE: CDE )
|First Majestic Silver (NYSE: AG )
Source: S&P Capital IQ.
Many silver companies have been generating increasingly high returns on equity without having to employ hardly any debt.
Co-founder Randy Smallwood has been CEO since last April. Before that, he was vice president of corporate development and has worked in mining for several years at Wheaton River Minerals and Goldcorp.
Silver mining isn't particularly susceptible to technological disruption, though, naturally, it is subject to fluctuations in silver prices.
The Foolish conclusion
So is Silver Wheaton a Buffett stock? It's a mixed picture. Regardless of whether Buffett would ever buy Silver Wheaton, we've learned that the company has had growing earnings, operates in a technologically straightforward industry, and has produced moderately high returns on equity with limited debt. However, Buffett could be reluctant because of commodity cyclicality and its relatively new CEO. However, if you'd like to stay up to speed on Silver Wheaton's progress or that of 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.
More Expert Advice from The Motley Fool
If you are looking for a company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, then Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008, and also has increased competitive advantages over its limited peer group. More details
about our outlook for Silver Wheaton can be found here
in our Motley Fool analyst report.