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 Johnson Controls
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 Johnson Controls 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 Johnson Controls' earnings and free cash flow history:
Source: S&P Capital IQ.
Like many other manufacturers, Johnson Controls' earnings took a big hit in 2009 during the economic downturn, but the company has rebounded dramatically along with the rest of the auto industry.
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.
Johnson Controls generates reasonably high returns on equity -- 15% over the past year, 11% on average over the past five years -- while carrying a moderate 52% debt-to-equity ratio.
CEO Stephen Roell has been at the job since 2007. Prior to that, he had served in various other jobs at the company, including chief financial officer since 1982.
The products that Johnson Controls manufactures aren't especially susceptible to technological disruption. The company is making a big push from its strong position in lead car batteries into hybrid batteries, but so far the transition is going fairly smoothly.
The Foolish conclusion
So is Johnson Controls a Buffett stock? Perhaps. It exhibits several of the quintessential characteristics of a Buffett company: fairly consistent earnings, high returns on equity with limited debt, extremely tenured management, and a straightforward business. To stay up to speed on Johnson Controls' 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.
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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.