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.
While we can't know for sure whether Buffett is about to buy Qualcomm
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 Qualcomm 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 Qualcomm's earnings and free cash flow:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Qualcomm's earnings have been pretty consistent, aside from 2009, when the company had to pay out some large legal settlements.
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) |
|---|---|---|---|
| Qualcomm | 5% | 18% | 17% |
|
InterDigital |
45% | 32% | 52% |
|
NVIDIA |
1% | 17% | 13% |
|
Broadcom |
12% | 19% | 9% |
Source: Capital IQ, a division of Standard & Poor's.
Qualcomm tends to generate moderately high returns on equity with almost no debt.
3. Management
CEO Paul Jacobs has been at the job since 2005. He's been at the company since 1990, when he joined as a software development manager.
4. Business
Though the company owns a portfolio of valuable patents, telecommunications devices are fairly susceptible to technological change -- Buffett might be a bit wary of investing in the industry.
The Foolish conclusion
Regardless of whether Buffett would ever buy Qualcomm, we've learned that, aside from the techiness of the industry, it exhibits several of the characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and tenured management.
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