As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands track his investments and try to glean what they can from his thinking processes.
While we can't know for sure whether Buffett is about to buy Research In Motion
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Research In Motion 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 Research In Motion'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.
Earnings and free cash flow have grown dramatically for Research In Motion over the past several 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.
Return on Equity (LTM)
Return on Equity (5-year average)
|Research In Motion||0%||38%||37%|
Source: Capital IQ, a division of Standard & Poor's.
Research In Motion generates an enormous return on equity while employing no debt.
Research In Motion is run by co-chairmen and co-CEOs James Balsillie, who’s been at the job since 1992, and Michael Lazaridis, who was one of the company’s co-founders.
The smartphone market is notoriously susceptible to technological and market disruption. Research In Motion, which once disrupted Palm, now finds itself struggling to maintain market share against Google’s
The Foolish conclusion
Though it’s unlikely Buffett would purchase shares of Research In Motion, because the industry is so subject to technological disruption, we've learned that for the time being, the company does exhibit some Buffett-esque economics to its business: consistent or growing earnings and high returns on equity with limited debt, in addition to tenured management.
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Ilan Moscovitz owns shares of Google and Apple. You can follow him on Twitter: @TMFDada. The Motley Fool owns shares of Apple, Google, and Research In Motion. Motley Fool newsletter services have recommended buying shares of Google and Apple. Motley Fool newsletter services have recommended creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.