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 Peabody Energy
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Peabody Energy 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 Peabody Energy’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.
Peabody Energy has managed to maintain earnings over the past five years, though their levels have been fairly volatile.
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 (5-year average)
Source: Capital IQ, a division of Standard & Poor's. *Negative equity in 2006.
Peabody Energy produces a moderately high return on equity to its peers while employing moderate debt.
CEO Greg Boyce has been at the job since 2006.
Coal production isn’t particularly susceptible to wholesale technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy Peabody Energy, we've learned that while the company hasn’t exhibited particularly consistent earnings, it bears some of the other characteristics of a quintessential Buffett investment: tenured management and a straightforward industry.
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Editor's note: A previous version of this article mistakenly identified Peabody’s CEO. The Fool regrets the error.
Ilan Moscovitz doesn’t own shares of any companies mentioned. You can follow him on Twitter @TMFDada. 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.