Is Baidu a Buffett Stock?

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 Baidu (Nasdaq: BIDU  ) (he hasn't specifically mentioned 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:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Baidu 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 Baidu's earnings and free cash flow history:

Source: S&P Capital IQ.

Over the past five years, Baidu's earnings and free cash flow have grown dramatically.

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 among peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.

Baidu generates an enormous return on equity -- 54% over the past year and 45% on average over the past five years -- while employing a modest 16% debt-to-equity ratio.

3. Management
Robin Li co-founded Baidu and has been its CEO since 2004. Prior to founding the company, he was an engineer at search engine Infoseek and a consultant with IDD Information Services.

4. Business
Despite its wide moat, Internet search is a fairly new industry that could be susceptible to technological and market disruption -- remember Excite and Lycos?

The Foolish conclusion
So is Baidu a Buffett stock? It's a mixed picture. The company easily exhibits many of the quintessential characteristics of a Buffett investment: consistent or growing earnings, high returns on equity with limited debt, and tenured management. But despite Buffett's and his right-hand man Munger's admiration for the competitive strengths of the search industry, they would be hesitant to invest in such a constantly evolving tech industry. But that fact alone doesn't necessarily make it a bad stock.

If you're interested in search, I'd also suggest you check out "The Only Stock You Need to Profit From the NEW Technology Revolution," a special report from The Motley Fool about a hot related field. I invite you to grab a free copy to discover everything you need to know about the stock. Simply click here.

Ilan Moscovitz doesn't own shares of any company mentioned. Motley Fool newsletter services have recommended buying shares of Baidu. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (0) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1856354, ~/Articles/ArticleHandler.aspx, 8/31/2014 2:43:48 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement