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
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 YRC 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'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.
Over the past four years, YRC had a difficult time producing earnings, while free cash flow has been negative over the past two.
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) |
|---|---|---|---|
| YRC Worldwide | N/A | N/A | N/A |
|
Con-way |
99% | 2% | 9% |
|
JB Hunt |
111% | 39% | 34% |
|
Old Dominion Freight |
34% | 15% | 13% |
Source: Capital IQ, a division of Standard & Poor's.
YRC doesn't have a return on equity or a debt-to-equity ratio because it has negative equity -- generally not a positive sign. The company has $972 million in net debt. Interest expenses were $156 million over the past 12 months, but the company had negative operating earnings of $120 million.
3. Management
CEO Bill Zollars has been at the job since 1999. Prior to that, he'd spent several years at a YRC subsidiary and Eastman Kodak.
4. Business
Trucking may not seem like an industry ripe for technological disruption. Still, there may be other forces at play -- Buffett has noted that there is an increasing competitive advantage for trains, which don't have to manage congested highways. This thesis played a role in Berkshire Hathaway's recent buyout of Burlington Northern and Buffett's prior purchases of Union Pacific and Norfolk Southern stock.
The Foolish conclusion
Regardless of whether Buffett would ever buy YRC, we've learned that while the company has tenured management and operates in a fairly straightforward industry, it doesn't particularly exhibit the other characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, and protection from technological and macro changes.
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