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 Chipotle Mexican Grill
Writing in a 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.
Although the company may be too small for Buffett to literally invest in, does Chipotle 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 Chipotle's earnings and free cash flow history:
Source: S&P Capital IQ.
Over the past five years, Chipotle's earnings and free cash flow have grown dramatically.
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 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.
Chipotle generates a high return on equity (23% over the past year, 19% on average over the past five years) while employing no debt.
Co-CEO Monty Moran has been at the job since 2009 after having been the company's chief operating officer. He shares the top spot with Steve Ells, who founded Chipotle in 1993.
Fast-casual restaurants aren't particularly susceptible to technological disruption.
The Foolish conclusion
So is Chipotle a Buffett stock? It could very well be. It exhibits many of the quintessential characteristics of a Buffett investment: consistent or growing earnings, high returns on equity with limited or no debt, tenured management, and a straightforward business. If you're looking for another great company, check out The Motley Fool's Top Stock for 2012, which details a stock our chief investment officer picked to beat the market. I invite you to download this special report for a limited time by clicking here -- it's free.
Ilan Moscovitz owns shares of Chipotle. The Motley Fool owns shares of Chipotle Mexican Grill. Motley Fool newsletter services have recommended buying shares of Chipotle Mexican Grill. 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.