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 Staples
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Staples 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 Staples’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.
While Staples’ earnings have eroded slightly in recent years, they’ve remained more or less stable over the past five.
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
Source: Capital IQ, a division of Standard & Poor's.
Staples produces a superior return on equity to its peers while employing limited debt.
CEO Ron Sargent has been at the job since 2002.
Office supply retail isn’t particularly susceptible to rapid technological disruption, although e-commerce has particularly hurt some of the weaker competitors in this sector.
The Foolish conclusion
Regardless of whether Buffett would ever buy Staples, we've learned that the company exhibits some of the characteristics of a quintessential Buffett investment: fairly consistent earnings, tenured management, and a straightforward industry, though it’s possible he would prefer to watch Staples to see if it can improve its earnings growth and return on equity somewhat.
If you’d like to stay up-to-speed on the top news and analysis on Staples 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.
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 Staples. Motley Fool newsletter services have recommended shorting Office Depot. 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.