Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy B&G Foods (NYSE: BGS ) -- 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 B&G Foods 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 B&G Foods' 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.
Over at least the past five years, B&G Foods' earnings and free cash flow have increased fairly substantially.
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)
|
| B&G Foods |
201% |
22% |
12% |
| Kellogg (NYSE: K ) |
245% |
51% |
54% |
| Campbell Soup (NYSE: CPB ) |
290% |
75% |
65% |
| McCormick (NYSE: MKC ) |
60% |
26% |
24% |
Source: Capital IQ, a division of Standard & Poor's.
B&G Foods tends to generate moderate returns on equity that are somewhat lower than its peers'. Like many of its peers, it utilizes a fair bit of debt.
3. Management
CEO David Wenner has been at the job since 1993. Prior to that, he was an assistant to the company's president for a few years, after holding some managerial positions in manufacturing and sales for Johnson & Johnson.
4. Business
Packaged food isn't particularly susceptible to technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy B&G Foods, we've learned that, while the company doesn't generate high returns on equity while employing limited debt, it does exhibit some of the characteristics of a quintessential Buffett investment: consistent or growing earnings, tenured management, and a straightforward industry.
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