As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
We can't know for sure whether Buffett is about to buy hhgregg
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does hhgregg 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 hhgregg'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.
hhgregg’s earnings have grown steadily over the past five years. (The free cash flow shortfall in 2010 was related to increased inventory.)
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 (4-Year Average)
Source: Capital IQ, a division of Standard & Poor's.
hhgregg generates a high return on equity without employing any debt.
CEO Dennis L. May has been at the job since 2009. Before that, he'd held other top jobs at hhgregg. He's joined by Executive Chairman Jerry Throgmartin, who's been at the company since 1975.
Consumer retail isn't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
Whether or not Buffett would buy shares of hhgregg, we've learned that the company exhibits some of the characteristics of a quintessential Buffett investment: consistent or growing earnings, high returns on equity with limited debt, tenured management, and a straightforward business.
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Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter at @TMFDada. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.