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 Huntington Bancshares
In his most recent 10-K, 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.
- Management in place.
- Simple, non-techno mumbo jumbo businesses.
Does Huntington Bancshares 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 Huntington Bancshares' earnings history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Huntington Bancshares has had a rough go of earnings lately. Obviously, this is by no means unusual for the commercial banking industry during a financial crisis.
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.
Since we're dealing with banks, let's use the Tier 1 capital ratio as a more appropriate substitute for debt to equity. You want to see a ratio greater than 12%:
|
Company |
Tier 1 Capital Ratio |
Return on Equity (LTM) |
Return on Equity (5-year average) |
|---|---|---|---|
|
Huntington Bancshares |
12.5% |
(8%) |
(3%) |
|
BB&T |
11.7% |
5% |
12% |
|
US Bancorp |
10.1% |
10% |
17% |
|
Zions Bancorp |
12.6% |
(9%) |
2% |
Source: Capital IQ, a division of Standard & Poor's.
Huntington Bancshares has a decent Tier 1 capital ratio -- not especially high, but not much worse than its peers'. Generating a decent return on equity has been tough, though -- while it averaged around 16% in both 2005 and 2006, that metric was devastated in subsequent years.
3. Management
Huntington Bancshares' CEO, Stephen Steinour, joined the company in the past few years.
4. Business
Commercial banking isn't a field that is particularly vulnerable to competing technological disruption.
The Foolish conclusion
Whether or not Buffett would ever invest in Huntington Bancshares, we've learned that, while its leverage is fairly normal for commercial banks, it's had difficulty in the past few years exhibiting the quintessential characteristics of a Buffett investment: high returns on equity, earnings stability, and long-tenured leadership.
