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 Research In Motion (Nasdaq: RIMM ) , 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 Research In Motion 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 Research In Motion's earnings and free cash flow history:
Source: S&P Capital IQ.
Research In Motion's earnings have grown considerably over the past few years, although they're fallen back recently because of rising expenses amid stagnant sales as the company struggles to compete with Apple's (Nasdaq: AAPL ) iPhones. Its market recently fell to 6.5% as Apple widened its fourth-place lead by rising to 11.2%. Analysts are forecasting earnings declines out for several more years.
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.
Historically Research In Motion has generated a high return on equity -- 37% on average over the past five years. The figure has sunk to 24% over the past year, lagging Apple's 46%, but it's still high in absolute terms -- for the time being. Neither company carries any debt.
CEO Thorsten Heins has been at the job only since January. Before that, he'd been at Research In Motion for a few years and served a brief stint as its chief operating officer after coming over from Siemens.
The mobile handset is extremely susceptible to technological disruption, with competitors recently being replaced every few years as newer models take the top spot.
The Foolish conclusion
So is Research In Motion a Buffett stock? No. Although the company may generate high returns on equity with limited debt, it doesn't exhibit the other quintessential characteristics of a Buffett investment: consistent earnings, tenured management, and a straightforward business.
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