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 Manitowoc (NYSE: MTW) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us.

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:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. Simple, non-techno-mumbo-jumbo businesses.

Does Manitowoc 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 Manitowoc'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.

Like much of the construction equipment industry, Manitowoc took major losses in 2009. Despite expensive interest payments, it's actually managed to remain slightly profitable if you exclude a bunch of unusual items like writedowns, restructurings, and charges for recalling debt early.

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.



Return on Equity (LTM)

Return on Equity
(5-year average)

Manitowoc 426% (15%) (4%)
Caterpillar (NYSE: CAT) 247% 34% 35%
Terex (NYSE: TEX) 65% (6%) 3%
Deere (NYSE: DE) 347% 38% 25%

Source: Capital IQ, a division of Standard & Poor's. LTM = last 12 months.

Manitowoc exhibits lower returns on equity than its peers, as well as a higher debt-to-equity ratio.

3. Management
CEO Glen Tellock has been at the job since 2007. Before that, he served in various roles at the company for a number of years.

4. Business
Construction and food service equipment isn't particularly prone to technical disruption -- we're not talking astro-nanorobotics here.

The Foolish conclusion
Whether or not Buffett would ever buy Manitowoc, we've learned that while the company operates in a simple business and its CEO has experience within the company, it doesn't exhibit the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt.

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