Polaris Scores 100% on Buffett Model

11/16/2015 7:00 am EST


John Reese

Founder and CEO, Validea.com And Validea Capital Management

A bedrock principle for Warren Buffett is that a company has a durable competitive advantage, explains John Reeese, editor of Validea, which assesses stocks based on the investing criteria of legendary investors.

Such is the case with Polaris (PII), which scores a 100% rating on our Buffett-based investment model.

Buffett likes companies to have solid, stable earnings that are continually expanding. This allows him to accurately predict future earnings.

Buffett would consider PII's earnings predictable, with the most recent decline six years ago.

Polaris' long-term historical earnings per share growth rate is 16.1%, based on the 10-year average EPS growth rate and it is expected to grow earnings 15.0% per year in the future, based on the analysts' consensus estimated long-term growth rate.

Buffett likes companies that are conservatively financed. Nonetheless, he has invested in companies with large financing divisions and in firms with rather high levels of debt.

PII has a debt of 311.8 million and earnings of 473.7 million, which could be used to pay off the debt in less than two years, which is considered exceptional.

Buffett likes companies with above average return on equity of at least 15% or better, as this is an indicator that the company has a durable competitive advantage.

US corporations have, on average, returned about 12% on equity over the last 30 years. The average return on equity, over the last ten years, is 42.1%, which is high enough to pass.

In addition, the average return on equity over the last three years must exceed 15%.  Buffett also requires that the average return on total capital be at least 12% and consistent. Again, Polaris passes these tests.

PII's free cash flow per share of $2.89 is positive, indicating that the company is generating more cash that it is consuming. This is a favorable sign and so the company passes this criterion.

Buffett likes to see if management has spent retained earnings in a way that benefits shareholders.

To figure this out, Buffett takes the total amount of retained earnings over the previous ten years of $19.61 and compares it to the gain in EPS over the same period of $5.08.

PII's management has proven it can earn shareholders a 25.9% return on the earnings they kept. This return is more than acceptable to Buffett. Essentially, management is doing a great job putting the retained earnings to work.

Based on our Buffett methodology, investors could expect an average return of 21.6% on PII stock for the next ten years, based on the current fundamentals. Buffett would consider this a great return, thus passing the criterion.

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