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 Seaspan (NYSE: SSW ) -- 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 Seaspan 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 Seaspan'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 five years, Seaspan has struggled to maintain consistent earnings.
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)
|
|
Seaspan
|
212%
|
8%
|
(7%)
|
|
DryShips (Nasdaq: DRYS )
|
72%
|
6%
|
14%
|
|
Costamare (Nasdaq: CMRE )
|
411%
|
30%
|
8%
|
|
Danaos (NYSE: DAC )
|
747%
|
(1%)
|
10%
|
Source: Capital IQ, a division of Standard & Poor's.
Like many of its peers in the highly competitive, capital-intensive shipping industry, Seaspan tends to generate modest returns on equity while employing a large amount of debt.
3. Management
CEO Gerry Wang has been at the job since 2005. He's been at the company for more than two decades.
4. Business
The shipping industry isn't particularly susceptible to technological disruption, though it can be quite cyclical and dependent on the state of the economy.
The Foolish conclusion
Regardless of whether Buffett would ever purchase shares of Seaspan, we've learned that, while the company does have tenured management and operates in a straightforward industry, it doesn't exhibit some of the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt.
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