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 Pilgrim's Pride
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 Pilgrim's Pride 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 Pilgrim's Pride'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.
Pilgrim's Pride has had some difficulty maintaining consistent over the past five years, though they seem to be improving over the past couple of years.
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) |
|---|---|---|---|
| Pilgrim's Pride | 183% | (16%) | (26%) |
|
Tyson Foods |
43% | 17% | 2% |
|
Smithfield Foods |
60% | 17% | 4% |
|
Hormel |
23% | 19% | 16% |
Source: Capital IQ, a division of Standard & Poor's.
Pilgrim's Pride generates a negative return on equity while employing significant debt.
3. Management
CEO Bill Lovette has been at the job since January. Before that, he has at Case Foods and Tyson for 27 years.
4. Business
Chicken isn't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
Whether or not Buffett would buy shares of Pilgrim's Pride, we've learned that, while the company operates in a straightforward industry, it doesn't exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and tenured management.
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