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 Hansen Natural
In his most 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 Hansen Natural 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 Hansen Natural's earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over the past five years, Hansen Natural has grown its earnings and free cash flow considerably, largely on the strength of its Monster Energy drinks.
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.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company |
Debt-to-Equity Ratio |
Return on Equity (LTM) |
Return on Equity |
|---|---|---|---|
| Hansen Natural | 0% | 31% | 40% |
|
Coca-Cola |
80% | 42% | 32% |
|
PepsiCo |
115% | 27% | 36% |
|
National Beverage |
0% | 39% | 17% |
Source: Capital IQ, a division of Standard & Poor's.
Like much of its industry, Hansen Natural produces high returns on equity. Hansen is helped in this regard by the fact that it doesn't manufacture its own drinks, but rather develops, markets, and distributes them. Hansen doesn't carry any debt.
3. Management
CEO Rodney Sacks has been at the job since 1990.
4. Business
The beverage industry isn't particularly susceptible to technological disruption, though Buffett might be a bit uncomfortable investing in new (and to that extent unproven) product categories like energy drinks.
The Foolish conclusion
Regardless of whether Buffett would ever buy Hansen Natural, we've learned that it exhibits some of the quintessential characteristics of a Buffett investment: consistent or growing earnings, high returns on equity with limited debt, and tenured management.
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