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 Diana Shipping (NYSE: DSX ) -- 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.
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Diana Shipping 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 Diana Shipping’s 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.
While the economic downturn limited Diana’s earnings growth, the company has managed to maintain somewhat consistent earnings over the past five 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 context.
|
Company
|
Debt-to-Equity
|
Return on Equity (LTM)
|
Return on Equity (5-year average)
|
|
Diana Shipping
|
32%
|
12%
|
19%
|
|
DryShips (Nasdaq: DRYS )
|
72%
|
6%
|
11%
|
|
Genco Shipping (NYSE: GNK )
|
131%
|
0%
|
17%
|
|
Eagle Bulk Shipping (Nasdaq: EGLE )
|
175%
|
3%
|
7%
|
Source: Capital IQ, a division of Standard & Poor's.
Diana Shipping generated superior returns on equity relative to its peers while employing much less debt.
3. Management
Simeon Palios took the position of CEO in 2005. He has about four decades of experience in the shipping industry and formed Diana Shipping agencies in 1972.
4. Business
The shipping industry isn’t especially susceptible to technological disruption, though it can be cyclical and sensitive to general economic conditions.
The Foolish conclusion
Whether or not Buffett would buy shares of Diana Shipping, we’ve learned that it exhibits many of the quintessential characteristics of a Buffett investment: consistent earnings, fairly high returns on equity with limited debt, tenured management, and a straightforward business.
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