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 Paychex (Nasdaq: PAYX ) -- 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 Paychex 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 Paychex's earnings and free cash flow history:
Source: S&P Capital IQ.
Paychex's earnings have been fairly consistent over the past several 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 -- 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.
Paychex generates an enormous return on equity -- 35% over the past year, 36% on average over the past five years -- without employing debt.
CEO Martin Mucci has only been at the job since 2010. But before that he helped run the bulk of its business operations for eight years.
Payroll management hasn't been susceptible to technological disruption.
The Foolish conclusion
So is Paychex a Buffett stock? It could very well be. The company exhibits several of the quintessential characteristics of a Buffett investment: consistent earnings, high returns on equity with limited debt, tenured management, and a straightforward business. To stay up to speed on Paychex'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 by clicking here.