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 New York Bancorp
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 New York Bancorp 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 New York Bancorp's earnings history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Like many banks, New York Bancorp's earnings took a hit in 2008, though they've since come back. Impressively, the bank has managed to maintain positive earnings over the past five turbulent 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. I'll be using a leverage ratio defined as assets divided by equity, which is more appropriate for banks. In the United States, about 10 to 12 times is considered normal.
|
Company |
Leverage Ratio |
Return on Equity (LTM) |
Return on Equity (5-Year Average) |
|---|---|---|---|
|
New York Community Bancorp |
7.3 times |
10% |
7% |
|
Hudson City Bancorp |
10.6 times |
(4%) |
8% |
|
First Niagara Financial Group |
7.7 times |
4% |
6% |
|
People's United Financial |
4.9 times |
3% |
4% |
Source: Capital IQ, a division of Standard & Poor's.
Compared with its peers, New York Bancorp generated a fairly high return on equity while employing moderate leverage.
3. Management
CEO Joseph Ficalora has been at the job since the bank was founded in 1993. He's also a director of the American Bankers Association, a major banking lobby group.
4. Business
The banking industry isn't especially susceptible to technological disruption, but, as the past several years have shown us, banks that delve too deeply into complexity and risk can be vulnerable to credit and economic cycles, as well as disasters of their own making. Megabank Wells Fargo is a major Buffett holding.
The Foolish conclusion
Whether Buffett would buy shares of New York Bancorp, we've learned that the company exhibits several of quintessential characteristics of a Buffett investment: fairly consistent earnings, high returns on equity with limited debt, tenured management, and a technologically straightforward industry.
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