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 Advanced Micro Devices (NYSE: AMD) -- 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 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:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does AMD 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 AMD'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 five years, AMD has had difficulty earning money.

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 among peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.



Return on Equity (LTM)

Return on Equity (5-Year Average)

Advanced Micro Devices 143% 62% (27%)
Intel (Nasdaq: INTC) 5% 27% 16%
Texas Instruments (NYSE: TXN) 0% 32% 23%
Marvell (Nasdaq: MRVL) 0% 18% 5%

Source: Capital IQ, a division of Standard & Poor's.

AMD had a pretty solid 2010, though the trailing-five-year period was less positive. AMD has a significantly higher debt-to-equity ratio than its peers do.

3. Management
CFO Thomas Seifert, who has been with the company only since 2009, is currently serving as interim CEO.

4. Business
So far as tech companies go, AMD's products aren't historically susceptible to technological disruption. The company has been in a continued dogfight with Intel for well over a decade. However, new mobile processors from the likes of Marvell and Texas Instruments are pressuring PC sales as more consumers spend their discretionary dollars on tablets and smartphones. Continual innovation is very important in this industry, and Buffett might be a bit wary of investing in any semiconductor company, let alone one whose fortunes continually change as much as AMD.

The Foolish conclusion
Regardless of whether Buffett would ever buy Advanced Micro Devices, we've learned that it doesn't particularly exhibit the characteristics of a quintessential Buffett investment: consistent earnings power, high returns on equity with limited debt, tenured management, and a simple industry.

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