As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. Thousands try to glean what they can from his thinking processes and track his investments.
We can't know for sure whether Buffett is about to buy Nordic American Tankers (NYS: NAT) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal 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 Nordic American Tankers 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 Nordic American Tankers' 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.
Like much of the shipping industry, Nordic American's earnings have fluctuated pretty substantially with the volatile global economy over the past few 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 among peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
Return on Equity (LTM)
Return on Equity (5-Year Average)
|Nordic American Tankers||9%||(4%)||7%|
|Frontline (NYS: FRO)||369%||(2%)||57%|
|General Maritime (NYS: GMR)||391%||(58%)||(6%)|
|Teekay (NYS: TK)||174%||(4%)||0%|
Source: Capital IQ, a division of Standard & Poor's.
The past 12 months have been a period of accrual losses, but over recent history Nordic American has produced modest, though superior, returns on equity compared to its peers (with the exception of Frontline). Unlike much of the heavily leveraged industry, it carries very little debt.
CEO Herbjorn Hansson has been at the job a very long time -- since 1995.
Crude oil shipping may be subject to macro conditions, but it isn't particularly prone to technical disruption -- we're not talking astro-bionanorobotics here.
The Foolish conclusion
Regardless of whether Buffett would ever buy Nordic American, we've learned that the company exhibits some of the characteristics of a quintessential Buffett investment: low debt levels, established management, and a technologically straightforward industry. On the other hand, earnings have been somewhat volatile, and returns on equity are probably lower than Buffett would like to see.
However, if you'd like to stay up to speed on the top news and analysis on Nordic American Tankers or any other stock, simply add it to your stock watchlist. If you don't have one yet, click here to create a free, personalized watchlist of your favorite stocks.
At the time this article was published Motley Fool Financial Editor Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter at @TMFDada. The Motley Fool owns shares of General Maritime. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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