What is the Buffettology: EPS Growth screen?
The Buffettology: EPS Growth screen turns Warren Buffett's habit of buying durable businesses into a set of rules an individual can run. It comes from Buffettology (1997), the book by Mary Buffett, a former daughter-in-law of Buffett's, and David Clark, a family friend and portfolio manager, who reverse-engineered the approach Buffett rarely spelled out himself. The American Association of Individual Investors coded that logic into a repeatable stock screen. This version keys on one idea above the rest: a company whose earnings per share have climbed steadily, year after year, without the lurches that mark a commodity business.
The core idea: earnings you can predict
Buffett's central bet is that a "consumer monopoly" — a firm protected by a brand, patent, or niche no rival can easily copy — earns predictable profits, and predictable profits are what let you value a stock with any confidence. If you cannot forecast the next decade's earnings, you are guessing at the price. So the screen leans hard on the earnings record. It rewards a high, top-quartile seven-year EPS growth rate, insists the recent three-year rate be at least as fast so earnings are still accelerating rather than fading, and demands positive earnings in every one of the last seven years. Steady beats spectacular here.
Quality checks sit alongside the growth. Operating and net profit margins must clear the industry median, evidence the firm charges more than its costs because customers will pay up. Return on equity — both the current figure and the seven-year average — has to top 12%, the long-run market average Mary Buffett cites, so the business earns a genuine premium on shareholder capital. Total liabilities are held below the industry norm, since a real monopoly throws off cash and rarely needs much debt.
What the screen looks for
- No over-the-counter (OTC) stocks — the screen sticks to exchange-listed names.
- Current operating margin at or above the industry's median operating margin.
- Current net profit margin at or above the industry's median net profit margin.
- Total liabilities to total assets, most recent quarter, at or below the industry median for that period — a relative test for conservative financing.
- Seven-year EPS growth from continuing operations ranking in the top quartile of the database (percentile rank ≥ 75).
- Three-year EPS growth greater than or equal to the seven-year rate, so the trend is holding or accelerating.
- Positive EPS from continuing operations over the trailing 12 months and in each of the last seven fiscal years.
- Current return on equity above 12%.
- Seven-year average return on equity above 12%.
- A projected 10-year rate of return of at least 15%, built from the historical earnings-growth model below.
The valuation math: projecting from historical earnings growth
This is the screen's signature and where it parts ways with its sustainable-growth sibling. Buffett treats a stock as a bond whose coupon happens to grow, so the exercise is to estimate that growing stream and back into a rate of return. Start with current earnings per share and compound them forward ten years at the company's own historical EPS growth rate. Multiply the year-ten earnings by the stock's average price-earnings ratio over its history to get a projected price, then add the dividends collected along the way. Compare that total to today's price, annualize it, and require at least 15%.
The book's worked example makes it concrete. Take a company earning $2.77 per share that has grown EPS 18.9% a year. Compounded for a decade, $2.77 becomes $15.64. Apply a historical average P/E of 14.0 and the projected price is $218.96; add roughly $13.32 of dividends and the ten-year total reaches $232.28. Against a current price of $48.25, that works out to about a 17.0% annual return — comfortably past the 15% floor. Notice what drives the answer: the growth rate and the P/E you assume. Both come from the firm's own past, which is exactly why the earlier filters spend so much effort proving the past was steady.
What to keep in mind
The projection is only as good as its two assumptions. Extending a 19% growth rate for ten more years is a strong claim; few companies compound that fast for that long, and moats erode — a brand or patent that looked untouchable in 1997 can be commoditized within a decade. The average-P/E input is just as fragile, because a re-rating in the market can swamp the earnings math. The screen also runs on seven years of data rather than the ten the book prefers, and the "positive every year" rule tolerates a dip so long as the number stays above zero. Treat a pass as the start of the homework — read the business and judge whether the monopoly is real — not the verdict.
Sources
Buffettology: The Previously Unexplained Techniques That Have Made Warren Buffett the World's Most Famous Investor, Mary Buffett and David Clark, Simon & Schuster, 1997.
American Association of Individual Investors (AAII) — Stock Investor Pro screen definition and commentary.