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 AgFeed
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 AgFeed 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 AgFeed'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.
AgFeed has grown reported earnings at a considerable pace over the past several years, though it recently hit a speed bump due to rising sales costs and a goodwill impairment charge.
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 |
|---|---|---|---|
| AgFeed | 57% | (32%) | 12% |
|
Zhongpin |
69% | 16% | 17% |
|
Tyson Foods |
43% | 17% | 2% |
|
Archer Daniels Midland |
85% | 13% | 15% |
Source: Capital IQ, a division of Standard & Poor's.
Historically, AgFeed has produced a decent return on equity. Recently, it's taken on a moderate amount of debt.
3. Management
Chairman John Stadler has been interim CEO since February. The company explains that he took over after the previous chairman stepped down to focus on government relations and the previous CEO stepped down to focus on the company's animal nutrition business, which is preparing to go public. Stadler is a founder of U.S. pork producer M2P2, which was acquired by AgFeed last year.
4. Business
Pork production isn't particularly susceptible to wholesale technological disruption, though it should be noted that much of AgFeed's growth comes from acquisitions, which depend somewhat on the company's relationship with government officials.
The Foolish conclusion
Regardless of whether Buffett would ever buy AgFeed -- or whether AgFeed is a good purchase -- we've learned that the company operates in a fairly straightforward industry, but it doesn't particularly exhibit the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and tenured management.
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