Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy Deckers
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Simple, non-techno mumbo-jumbo businesses.
Does Deckers 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 Deckers' earnings history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations. LTM = last 12 months.
Deckers is showing growing profits. That's a good sign.
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 actually is.
Because competitive strength is a comparison of peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
Return on Equity (LTM)
Return on Equity (5-year average)
Source: Capital IQ, a division of Standard & Poor's.
Over the past year, Deckers has exhibited higher returns on equity than its peers. Over a five-year period, however, it has returned about in line with the average. Deckers doesn't have any debt.
While no industry is completely immune to the vicissitudes of time, textiles and apparel isn't the most prone to technological disruption -- we're not talking astro-nanorobotics here.
The Foolish conclusion
Regardless of whether Buffett would ever buy Deckers, we've learned that the company exhibits some of the characteristics of a quintessential Buffett investment: consistent earnings power, moderate debt levels, a simple business, and high returns on equity.
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Ilan Moscovitz doesn't own shares of any company mentioned. Under Armour is a Motley Fool Rule Breakers recommendation and a Motley Fool Hidden Gems pick. Timberland is a Motley Fool Stock Advisor selection. The Fool owns shares of Timberland and Under Armour. 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.