Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to track his investments and glean what they can from his thinking processes.
While we can't know for sure whether Buffett is about to buy Caribou Coffee (Nasdaq: CBOU ) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform 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 Caribou Coffee 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 Caribou Coffee’s earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author’s calculations.
Caribou Coffee has a history of generating losses, though it’s managed to turn that trend around so far over the past two 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 actually 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
|
Return on Equity (LTM)
|
Return on Equity (5-year average)
|
| Caribou Coffee |
0% |
47% |
(11%) |
| Starbucks (Nasdaq: SBUX ) |
13% |
28% |
22% |
| Peet's (Nasdaq: PEET ) |
0% |
12% |
9% |
| Tim Hortons (NYSE: THI ) |
34% |
51% |
36% |
Source: Capital IQ, a division of Standard & Poor's.
Caribou’s enormous return on equity over the past year is partly due to a $21 million income tax credit that it received.
3. Management
CEO Michael Tattersfield has been at the job since 2008.
4. Business
Coffeeshops aren’t particularly susceptible to technological disruption, but there’s plenty of competition.
The Foolish conclusion
Regardless of whether Buffett would ever buy Caribou Coffee, we've learned that while the company operates in a straightforward industry, doesn’t carry any debt, and is starting to turn profits, it doesn’t particularly exhibit the characteristics of a quintessential Buffett investment: consistent and high returns on equity.
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