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 Sunrise Senior Living
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 Sunrise Senior Living 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 Sunrise Senior Living'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.
Though it's swung back to profitability, Sunrise Senior Living had trouble generating earnings and free cash flow from 2007-2009.
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 that 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 |
Return on Equity (LTM) |
Return on Equity (5-year average) |
|---|---|---|---|
| Sunrise Senior Living | 141% | 43% | (34%) |
|
Brookdale Senior Living |
234% | (4%) | (12%) |
|
Emeritus |
621% | (21%) | N/A* |
|
Amedisys |
19% | 11% | 16% |
Source: Capital IQ, a division of Standard & Poor's.
*Negative equity in 2006.
While its five-year average return on equity is negative, Sunrise Senior Living produced a high return on equity over the past year. However, that was in large part the result of its leverage and earnings from discontinued operations.
3. Management
Co-founder and Chairman Paul J. Klaassen has been around since the company's founding in 1981. CEO Mark Ordan has been at the job since 2008. Previously, he worked in real estate, health care, and investment banking.
4. Business
The senior living industry isn't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
Regardless of whether Buffett would ever buy Sunrise Senior Living, we've learned that while the company has tenured management and a straightforward industry, it doesn't particularly exhibit the other characteristics of a quintessential Buffett investment: consistent earnings, and high returns on equity with limited debt.
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A previous version of this article, which has been corrected, mistakenly identified Mr. Klaassen rather than Mr. Ordan as CEO. The Fool regrets the error.
