Is Garmin a Buffett Stock?

As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.

We can't know for sure whether Buffett is about to buy Garmin (NYSE: GRMN) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us.

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:

1. Consistent earnings power.
2. Good returns on equity with limited or no debt.
3. Management in place.
4. Simple, non-techno-mumbo-jumbo businesses.

Does Garmin 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 Garmin'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.

Garmin's earnings have been fairly stable, though they have eroded somewhat over the past few 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 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.

Source: Capital IQ, a division of Standard & Poor's.

Garmin produces fairly high returns on equity while employing no debt.

3. Management
CEO Min Kao has been at the job since 2002.

4. Business
GPS hardware and technology is rapidly evolving and ripe for technological disruption. The most obvious example is from smartphones with embedded GPS software.

The Foolish conclusion
Regardless of whether Buffett would ever buy Garmin, we've learned that, although the company doesn't operate in a particularly straightforward industry and has had some difficulty hanging on to past earnings rates, it bears some of the other characteristics of a quintessential Buffett investment: high returns on equity without debt and tenured management.

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