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 Boeing
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 Boeing 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 Boeing'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.
Over the past few years, Boeing's earnings have fluctuated somewhat amid economic volatility.
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) |
|---|---|---|---|
| Boeing | 292% | 96% | 106% |
|
United Technologies |
45% | 22% | 23% |
|
Honeywell |
65% | 21% | 19% |
|
Lockheed Martin |
132% | 68% | 55% |
Source: Capital IQ, a division of Standard & Poor's.
Boeing produces enormous returns on equity, though that owes partly to the company's higher-than-average leverage. (Return on capital is a more modest, though still quite respectable, 18%).
3. Management
CEO James McNerney has been at the job since 2005 after spending years at 3M and General Electric.
4. Business
While aviation requires constant research and development, it isn't particularly prone to technical disruption – we're not talking astro-bionanorobotics here.
The Foolish conclusion
Regardless of whether Buffett would ever buy Boeing, we've learned that while its earnings are a bit volatile, and the company does employ considerable leverage, it also exhibits some of the other characteristics of a quintessential Buffett investment: established management, a straightforward industry, and high returns on equity.
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