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 Eastman Kodak
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 Eastman Kodak 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 Eastman Kodak'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.
Eastman Kodak's had a difficult time generating net income over the past five years, though much of that was due to restructuring charges and writedowns on investments.
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 among 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) |
|---|---|---|---|
| Eastman Kodak Co. | N/A | N/A | N/A |
|
Xerox |
71% | 8% | 10% |
|
Hewlett-Packard |
55% | 22% | 20% |
|
Lexmark |
43% | 25% | 24% |
Source: Capital IQ, a division of Standard & Poor's.
Eastman Kodak doesn't have a return on equity or a debt-to-equity ratio because it has had negative earnings and negative equity.
3. Management
CEO Antonio Perez has been at the job since 2005, after serving as Kodak's COO for a couple of years. Before that, he worked for Hewlett-Packard for 25 years.
4. Business
The shift from film to digital cameras has taken a major toll on Kodak, whose trailing revenue has fallen to levels not seen in the last two decades (despite the fact that I still use their VC line). The company hasn't been able to fully adjust, though transitioning to digital technologies is one of Perez's goals.
The Foolish conclusion
Regardless of whether Buffett would ever buy Eastman Kodak, we've learned that while the company has a tenured CEO, it doesn't particularly exhibit the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity, and a straightforward industry.
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