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 Whole Foods
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 Whole Foods 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 Whole Foods' 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.
Though not entirely immune to the economic downturn, over the past five years, Whole Foods' earnings have been somewhat stable. Free cash flow was negative for several years on account of large capital expenditures.
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) |
|---|---|---|---|
|
Whole Foods |
8% |
12% |
11% |
|
BJ's Wholesale |
0% |
12% |
12% |
|
Safeway |
100% |
11% |
8% |
|
Kroger |
149% |
22% |
19% |
Source: Capital IQ, a division of Standard & Poor's.
Whole Foods produces moderate returns on equity with very limited debt.
3. Management
John Mackey has been CEO of the company since he co-founded it in 1978. Since 2010 he's shared the title of co-CEO with Walter Robb, who has been at Whole Foods since 1991.
4. Business
The supermarket industry isn't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy Whole Foods, we've learned that the company has had somewhat stable earnings and moderate returns on equity, and exhibits some of the other characteristics of a quintessential Buffett investment: tenured management, limited debt, and a straightforward industry.
If you'd like to stay up-to-speed on the top news and analysis on Whole Foods or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.
