Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, 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 YRC Worldwide (Nasdaq: YRCW ) -- he hasn't specifically mentioned anything about it to me -- he has left us some clues as to whether it's the sort of stock that might interest him. Answering that question could also tell us whether it's a stock that should interest us.
In his most recent 10-K filed with the SEC, Buffett lays out the qualities he looks for in an investment. In addition to adequate size and a reasonable valuation, he demands:
- Consistent earnings power
- Good returns on equity with limited or no debt
- Quality management
- Simple, non-techno mumbo-jumbo businesses
Does YRC Worldwide, which provides transportation 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 YRC Worldwide's recent earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Source: Capital IQ, a division of Standard & Poor's. Free is adjusted based on author's calculations.
YRC Worldwide has had difficulty generating earnings over the past several years.
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 between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry and competitors' context:
|
Company
|
Debt-to-Equity Ratio
|
Return on Equity (LTM)
|
Return on Equity (5-Year Average)
|
|
YRC Worldwide
|
N/A
|
N/A
|
(57%)
|
|
Hertz Global (NYSE: HTZ )
|
617%
|
(8%)
|
(7%)
|
|
J.B. Hunt Transport (Nasdaq: JBHT )
|
108%
|
30%
|
32%
|
|
Ryder System (NYSE: R )
|
180%
|
7%
|
13%
|
|
Union Pacific (NYSE: UNP )
|
54%
|
14%
|
12%
|
|
Norfolk Southern (NYSE: NSC )
|
63%
|
12%
|
15%
|
Source: Capital IQ, a division of Standard & Poor's.
YRC Worldwide doesn't have a return on equity or a debt to equity ratio because the company has negative equity -- not a good sign.
3. Management
The chairman and CEO, William Zollars, has been at the job since 1999.
4. Business
Trucking may not seem like an industry ripe for technological disruption. And it may not be. Still, there may be other forces at play -- Buffett himself has noted that there is an increasing competitive advantage for trains, which don't have to manage congested highways. This thesis likely played a role in Berkshire Hathaway's (NYSE: BRK-A ) recent buyout of Burlington Northern and his prior purchases of Union Pacific and Norfolk Southern stock.
The Foolish conclusion
Whether or not Buffett would ever invest in YRC Worldwide, we've learned that the company doesn't bear at least two of the quintessential characteristics of a Buffett investment: consistent earnings power and high returns on equity with little debt.
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