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 Avis
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 Avis 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 Avis' 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, Avis has had difficulty generating earnings.
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 Ratio |
Return on Equity (LTM) |
Return on Equity (5-year average) |
|---|---|---|---|
|
Avis Budget |
1,738% |
30% |
(42%) |
|
Hertz |
529% |
(1%) |
(9%) |
|
Dollar Thrifty Automotive |
282% |
25% |
(7%) |
|
Zipcar |
86% |
(19%) |
(5%) |
Source: Capital IQ, a division of Standard & Poor's.
Avis' return on equity is an irrelevant metric because its debt-to-equity ratio is so high.
3. Management
CEO Ron Nelson has been at the job since 2006. Prior to that, he worked for the company for a couple years and also helped found DreamWorks.
4. Business
Auto rental is a competitive, capital-intensive industry, but it's not particularly susceptible to technological disruption -- although Zipcar is attempting to disrupt the business model.
The Foolish conclusion
Regardless of whether Buffett would ever buy Avis, we've learned that while it has tenured management and a straightforward industry, it doesn't particularly exhibit some of the other quintessential characteristics of a Buffett investment: consistent earnings and high returns on equity with limited debt.
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