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 Sirius XM
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 Sirius XM 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 Sirius XM's earnings and free cash flow history:
Source: S&P Capital IQ.
Over the past several years, Sirius XM had a difficult time producing earnings and free cash flow. However, that's changed since fiscal 2010, and the company is now profitable.
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.
Over the past 12 months, Sirius has generated a remarkable return on equity of 80%. But that doesn't tell us very much because the figure is inflated by the company's whopping 343% debt-to-equity ratio.
CEO Mel Karmazin has been at the job since 2004 (when it was Sirius Satellite Radio). Before that, he'd spent several years at other broadcasters, including CBS and Viacom.
Fans of Sirius will point to the lack of meaningful direct competition in the satellite radio industry, but the medium is new and could be vulnerable to technological disruption from indirect competitors.
The Foolish conclusion
So is Sirius XM a Buffett stock? Probably not. While the company has tenured management, it doesn't yet particularly exhibit the other quintessential characteristics of a Buffett investment: consistent earnings, high returns on equity with limited debt, and a straightforward business. However, you can stay up to speed on Sirius XM's progress, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.
Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. 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.