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 Illinois Tool Works
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Illinois Tool Worksmeet 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 Illinois Tool Works' 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, Illinois Tool Works has generated reasonably steady 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:
Debt to Equity
Return on Equity (LTM)
Return on Equity (5-year average)
|Illinois Tool Works||32%||19%||17%|
Source: Capital IQ, a division of Standard & Poor's.
Illinois Tool Works generates moderately high returns on equity with limited debt.
CEO David Speer has been at the job since 2005.
The industrial machinery Illinois Tool Works produces isn't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy Illinois Tool Works, we've learned that it exhibits some of the characteristics of a quintessential Buffett investment: consistent earnings, reasonably strong returns on equity with limited debt, tenured management, and a straightforward business.
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Ilan Moscovitz doesn't own shares of any companies mentioned. You can follow him on Twitter@TMFDada. Motley Fool newsletter services have recommended buying shares of Illinois Tool Works. 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.