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 Qualcomm
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 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 history:
Source: S&P Capital IQ.
Despite the economic downturn, Qualcomm managed to grow its earnings over the past several years.
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.
Qualcomm generates fairly high returns on equity -- 17% both over the past year and on average over the past five years -- while carrying negligible debt.
CEO Paul Jacobs has been at the job only since 2009, though he's worked for the company since he began as an engineer in 1990, helping to manage the development of its technologies.
Telecommunications devices and technologies are fairly susceptible to technological change -- Buffett might be a bit wary of investing in the industry in general.
The Foolish conclusion
So is Qualcomm a Buffett stock? Probably not, as it doesn't operate in a particularly straightforward, predictable industry. But industry aside, the company does exhibit several of the fundamental characteristics of a Buffett investment: consistent or growing earnings, high returns on equity with limited debt, and tenured management. To stay up to speed on Qualcomm'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.
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Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter, where he goes by @TMFDada. The Motley Fool owns shares of Qualcomm and has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.