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 United Continental
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno mumbo jumbo businesses.
Does United Continental 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 United Continental'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, United Continental has had a somewhat difficult time generating consistent earnings.
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.
Return on Equity (LTM)
Return on Equity (5-year average)
Delta Air Lines
Source: Capital IQ, a division of Standard & Poor's.
United Continental has a pretty substantial debt load and negative equity. However, a lot of other airlines share these problems.
CEO Jeffery Smisek has been at the job since last October, but he's had years of executive experience elsewhere in the airline business.
The airline industry isn't particularly susceptible to technological disruption, though it can be brutally competitive.
The Foolish conclusion
Regardless of whether Buffett would ever buy United Continental, we've learned that while it operates in a fairly straightforward industry, the airline doesn't particularly exhibit the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and long-tenured management.
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Ilan Moscovitz doesn't own shares of any companies mentioned. Motley Fool newsletter services have recommended buying shares of Southwest Airlines. 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.