As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
We can't know for sure whether Buffett is about to buy PPL (NYSE: PPL ) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal whether it's a stock that should interest us. In this series, we do just that.
Writing in a 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:
Does PPL 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 PPL's earnings and free cash flow history:
Source: S&P Capital IQ.
Source: S&P Capital IQ.
Over the past five years, PPL's earnings have fluctuated a bit with the weak economy, though they have recovered since 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 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 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 | 5-Year Average Return on Equity |
|---|---|---|---|
| PPL | 167% | 14% | 14% |
| Duke | 88% | 8% | 6% |
| Progress Energy | 128% | 8% | 8% |
| Southern | 111% | 12% | 12% |
Source: S&P Capital IQ.�
PPL generates above-average returns on equity. Part of that high return formula, however, comes from employing more debt than its peers.
3. Management
CEO Bill Spence has been at the job only since November. But he does have a bit more experience at the company. Before taking over the top spot, he ran the company's nuclear operations for a few years and briefly served as its chief operating officer. He spent several years at Pepco before coming to PPL.
4. Business
Electric utilities aren't particularly susceptible to wholesale technological disruption.
The Foolish conclusion
So is PPL a Buffett stock? Probably not. The company operates in a technologically straightforward industry, but it doesn't particularly exhibit the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and tenured management. However, you can stay up to speed on PPL's progress by adding it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
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