Two More Tech Buffett Companies
Nikhil is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Buffett companies aren't conventionally thought of as being in the tech industry, so I decided I had to take up the challenge and find two tech companies that had the qualities I, and hopefully Buffett, was looking for. I mentioned them previously in this article: Adobe Inc. (NASDAQ: ADBE), and Texas Instruments(NASDAQ: TXN).
As I did with Apple here, I'll go through with a quick fundamental overview of the two companies to show where their Buffett moats stick out. Clearly, these two companies aren't comparable. They are in two totally different industries and serve totally different needs. However, it will still be interesting seeing how two TECH companies, from totally different industries have Buffett qualities, and how they look side by side.
|Gross Profit Margin||49.3%||89.6%|
So clearly, depreciation isn't a big factor in their income statements, which is definitely a good thing to check off the list. Both companies have huge gross profit margins. The "Buffett Criteria" is a gross margin above 40%. Adobe's gross margin clears this by so much just because its a software company, so take it with a grain of salt, Adobe's margins should be expected to be this high. Buffett also prefers SG&A expenses to be below 30% of revenue, which is the only really disturbing sign in Adobe's income statement. Its also interesting that as a software company, Adobe spends more on R&D than semiconductor company Texas Instruments. Also, not shown above, Texas Instruments has a net profit margin of about 16%, and Adobe has a net profit margin of just under 19%.
Consistency of Net Earnings:
Adobe's Earnings per share have increased consistently for the last 10 years at 14.53% compounded annually. The reason for this is Adobe's dominance in the industry's it controls, and the increasing dominance in industries it doesn't. As consumers can more easily access DSLRs and self-edit their own professional pictures, there is an increased desire to use 'the best of the best' in digital post-processing technologies. Not only is Adobe's photo processing the best in its industry, it has brand recognition, which is probably why earnings have grown so consistently.
Texas Instruments's earnings per share haven't done nearly as well, mostly due to an abberation in earnings. In the last 10 years, compounded annual earnings growth was 4.1%, however, in the last 8 years, TXN has grown earnings at an 18.39% compounded annual rate. The reason for this? After 2000, the tech bubble killed TXN. 2001 and 2002 were the last years of net loss that Texas Instruments has faced. Of course, this masks the huge compound annual growth that we have witnessed since then, which is why I believe Texas Instruments still has so much potential as a Buffett Company.
Balance Sheet Ratios and Cash Flows:
|Metrics/Companies||Texas Instruments||Adobe Inc.|
|Return on Equity||21%||15.18%|
|Return on Assets||13.2%||9.72%|
With consistently high returns on equity and assets, both companies have a strong business performance in the last few years. They are also very liquid, with current ratios above 2.
Both TXN and ADBE do have advantages that Apple hasn't used: Treasury Stock, which shows that their management knows how to manage their respective businesses. Altogether, both companies have strong business positions that should perform well going forward.
A key to Buffett's buying has to do with price of course, so its important that before making a rash call, we take a look at valuation. TXN has an EV/EBITDA of 9.04, and ADBE has an EV/EBITDA of 9.64. Obviously, more research would be required before making a buy, but I think its clear from this that there is some value here. Quality companies at Quality Prices.
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