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 Clorox
In his 10-K filings, Buffett lays out the qualities he looks for in an investment. In addition to adequate size 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 Clorox 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 Clorox'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.
Clorox has generated fairly consistent earnings 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 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 put them in context:
Return on Equity (LTM)
Return on Equity (5-year average)
Procter & Gamble
Church & Dwight
Source: Capital IQ, a division of Standard & Poor's.
Clorox has had so little equity that its return on equity is a basically meaningless metric. The company closed out a few of its recent years with negative equity.
CEO Donald Knauss has been at the job since 2006.
Cleaning and household products are not particularly susceptible to technological disruption.
The Foolish conclusion
Whether or not Buffett would ever invest in Clorox, we've learned that it exhibits some of the characteristics of a quintessential Buffett investment: consistent earnings, tenured management, and a straightforward industry.
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Ilan Moscovitz doesn't own shares of any company mentioned. Clorox and Procter & Gamble are Motley Fool Income Investor picks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.