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 Tyson Foods
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.
Does Tyson 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 Tyson's earnings and free cash flow history:
Source: S&P Capital IQ.
Tyson has tended to generate consistent earnings in the past few years. However, 2008 and 2009 were down years, with 2009's big losses coming largely from acquisition writedowns.
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 really is.
Tyson generates moderately low returns on equity -- 10% over the past year, 5% on average over the past five years -- while carrying a moderately large debt-to-equity ratio of 38%.
CEO Donnie Smith has been at the job since 2009. He's been at Tyson in various roles since 1980.
Meat production isn't particularly susceptible to technological disruption.
The Foolish conclusion
So is Tyson a Buffett stock? Probably not. Although it operates in a straightforward industry, has experienced management, and generates more-or-less consistent earnings, the company doesn't as of yet generate particularly high returns on equity. However, if you're interested in a stock that our top analysts and chief investment officer picked to beat the market, you can check out "The Motley Fool's Top Stock for 2012." I invite you to download this special report for a limited time by clicking here – it's free.
Ilan Moscovitz doesn't own shares of any company mentioned. 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.