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.
While we can’t know for sure whether Buffett is about to buy Republic Services (NYSE: RSG ) — he hasn’t specifically mentioned anything about it to me — we can discover whether it’s the sort of stock that might interest him. Answering that question could also inform whether it’s a stock that should interest us.
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Republic Services 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 Republic Services’ earnings and free cash flow:
Source: Capital IQ, a division of Standard & Poor’s. Free cash flow is adjusted based on author’s calculations.
Over the past five years, Republic Services has had pretty consistent earnings, with the exception of 2008.
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 among peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
Return on Equity (LTM)
Return on Equity
|Waste Management (NYSE: WM )||137%||15%||18%|
|Stericycle (Nasdaq: SRCL )||99%||20%||20%|
|Waste Connections (NYSE: WCN )||83%||12%||11%|
Source: Capital IQ, a division of Standard & Poor’s.
Republic Services tends to generate modest returns on equity with moderate debt.
CEO Don Slager has been at the job since January. Prior to that, he founded Allied Industries.
Waste disposal isn’t particularly susceptible to technological disruption.
The Foolish conclusion
So is Republic Services a Buffett stock? It’s a mixed picture. Regardless of whether Buffett would ever buy Republic Services, we’ve learned that while the company doesn’t generate high returns on equity with limited debt, it does exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings and a straightforward industry.
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