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 Rite Aid
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 Rite Aid 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 Rite Aid’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.
Over the past five years, Rite Aid has generated mostly losses.
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) |
|---|---|---|---|
|
Rite Aid |
N/A |
N/A |
N/A |
|
CVS |
26% |
9% |
12% |
|
Walgreen |
16% |
16% |
17% |
|
Express Scripts |
63% |
33% |
52% |
Source: Capital IQ, a division of Standard & Poor's.
Rite Aid doesn’t have a return on equity or a debt-to-equity ratio because it has negative equity -- generally not a positive sign. It has $5.9 billion in net debt and an interest coverage rate of 0.5 times.
3. Management
CEO John Standley has been at the job for about a year. Prior to that, he’d served as Rite Aid’s CFO and the CEO of a supermarket chain.
4. Business
Drug stores aren’t particularly susceptible to technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy Rite Aid, we've learned that while the company operates in a fairly straightforward industry, it doesn’t particularly exhibit the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, tenured management.
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