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 Walgreen
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 Walgreen 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 Walgreen'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.
Despite the recent recession, net income has held steady. Free cash flow surged over the last three years due to a combination of rising operating cash flow and dramatically reduced capital expenditures.
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:
|
Company |
Debt-to-Equity Ratio |
Return on Equity (LTM) |
Return on Equity |
|---|---|---|---|
| Walgreen | 16% | 15% | 17% |
|
CVS |
27% | 9% | 12% |
|
Rite Aid |
N/A | N/A | N/A |
Source: Capital IQ, a division of Standard & Poor's.
Walgreen generates superior returns on equity to its peers while employing minimal debt. (Rite Aid is unprofitable and has negative equity).
3. Management
CEO Greg Wasson has only been at the job since early 2009, though he's served in other roles with the company for nearly three decades.
4. Business
Drugstores aren't particularly susceptible to technological disruption.
The Foolish conclusion
Whether or not Buffett would ever invest in Walgreen, we've learned that it exhibits many of the characteristics of a quintessential Buffett investment: consistent earnings, fairly high returns on equity with minimal debt, and a straightforward industry. Wasson has a great deal of experience within the company, though it's possible Buffett might prefer to see how things go for a few more years in his new role as CEO.
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