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 a pre-spinoff Sara Lee
In his 10-K filings, Buffett lays out the qualities he looks for in an investment. In addition to adequate size 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 Sara Lee 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 Sara Lee'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.
Sara Lee's free cash flow has remained somewhat stable over the past few years, while earnings have rebounded from the recessionary plunge and years of restructuring charges.
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 put them in context. Note that I've also included peers of Sara Lee's packaged-meats business, which the company plans to spin off in about a year.
Return on Equity (LTM)
Return on Equity
Source: Capital IQ, a division of Standard & Poor's.
Sara Lee generates midteens returns on equity that are in line with its peers, and it employs a fair bit of debt.
CEO Marcel Smits has been at the job since January and has only been with the company a couple of years. Prior to that he worked in the telecom, consumer goods, and finance sectors.
Food isn't particularly susceptible to technological disruption.
The Foolish conclusion
Whether or not Buffett would ever invest in Sara Lee, we've learned that it operates in a straightforward industry with somewhat stable earnings and free cash flow. However, it doesn't particularly exhibit the other characteristics of a quintessential Buffett investment: high returns on equity with limited debt and long-tenured management.
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Ilan Moscovitz doesn't own shares of any company mentioned. 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.