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 Zipcar
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 Zipcar 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 Zipcar'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 four years, Zipcar has had a difficult time generating 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.
|
Company |
Debt-to-Equity |
Return on Equity (LTM) |
Return on Equity (5-year average) |
|---|---|---|---|
|
Zipcar |
86% |
(19%) |
(5%) |
|
Hertz |
529% |
(1%) |
(9%) |
|
Dollar Thrifty Automotive |
282% |
25% |
(7%) |
|
Avis Budget Group |
1738% |
30% |
(42%) |
Source: Capital IQ, a division of Standard & Poor's.
Zipcar has been producing a negative return on equity. Its moderate leverage is considerably lower compared to its peers'.
3. Management
CEO Scott Griffith has been at the job since 2003.
4. Business
Car rental isn't particularly susceptible to technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy Zipcar, we've learned that the company has tenured management, operates in a fairly straightforward industry, and bears less leverage than its peers. However, right now it doesn't particularly exhibit the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity.
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