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 Qualcomm
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Qualcomm 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 Qualcomm'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.
Aside from 2009, Qualcomm's earnings power has been fairly consistent.
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)
Source: Capital IQ, a division of Standard & Poor's.
Qualcomm produces fairly high returns on equity while employing little debt. (InterDigital, which has the highest return on equity of the bunch, has a different business mix that is more focused on the capital-light licensing business.)
CEO Paul Jacobs has been at the job since 2005.
Telecommunications devices are fairly susceptible to technological change -- Buffett might be a bit wary of investing in the industry.
The Foolish conclusion
Regardless of whether Buffett would ever buy Qualcomm, we've learned that, aside from the techiness of its industry, the company exhibits several characteristics of a quintessential Buffett investment: consistent earnings power, fairly high returns on equity with limited debt, and tenured management.
Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of Qualcomm. Motley Fool newsletter services have recommended buying shares of NVIDIA and InterDigital and writing puts in NVIDIA. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.