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 Deere
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 Deere 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 Deere's earnings and free cash flow history:
Source: S&P Capital IQ.
Deere's earnings have fluctuated quite a bit with the state of the global economy, but the company has managed to remain profitable, and earnings have rebounded considerably. The free cash flow decline is mostly due to rising investments in inventory and capital improvements.
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.
We have to consider that close to two-thirds of Deere's assets are in its financial-services division, which obviously carries more debt than a pure manufacturer would. Taking that into consideration, Deere's 42% return on equity over the past year, or 29% on average over the past five years, is impressive, and its debt-to-equity ratio of 415%, while leveraged, seems fairly normal.
CEO Sam Allen has been at the job since 2009, though he'd been at the company for several years before that in various other positions.
Farm and construction equipment isn't particularly susceptible to technological disruption.
The Foolish conclusion
So is Deere a Buffett stock? Perhaps. The company exhibits several of the quintessential characteristics of a Buffett investment: more-or-less consistent earnings, high returns on equity with fairly limited debt, a straightforward business, and reasonably tenured management. To stay up to speed on the top news and analysis on Deere or any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
Ilan Moscovitz doesn't own shares of any company mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.