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 Fuel Systems Solutions
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 Fuel Systems 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 Fuel Systems' 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.
Fuel Systems has managed to grow its earnings and free cash flow over the past five years.
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) |
|---|---|---|---|
|
Fuel Systems |
4% |
4% |
14% |
|
Badger Meter |
8% |
17% |
22% |
|
EnerNOC |
0% |
2% |
(29%) |
|
Itron |
37% |
7% |
3% |
Source: Capital IQ, a division of Standard & Poor's.
Fuel Systems produces low-to-moderate returns on equity while employing almost no debt.
3. Management
CEO Mariano Costamagna has been at the job since 2005.
4. Business
Alternative fuel components are somewhat susceptible to technological disruption, though perhaps not to the extent, say, of biotech.
The Foolish conclusion
Regardless of whether Buffett would ever buy Fuel Systems, we've learned that while the company doesn't exhibit particularly high returns on equity, it bears some of the other characteristics of a quintessential Buffett investment: consistent or growing earnings, limited debt, and tenured management.
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