Is New York Bancorp a Buffett Stock?
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 (NYS: NYB) -- 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 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 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 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.
Return on Equity (LTM)
Return on Equity (5-Year Average)
New York Community Bancorp
Hudson City Bancorp (NAS: HCBK)
First Niagara Financial Group (NAS: FNFG)
People's United Financial (NAS: PBCT)
Source: Capital IQ, a division of Standard & Poor's.
Compared its peers, New York Bancorp generated a fairly high return on equity while employing moderate leverage.
CEO Joseph Ficalora has been at the job since the bank was founded in 1993. He's also a director of American Bankers Association, a major banking lobby group.
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 or not 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.
If you'd like to stay up-to-speed on the top news and analysis on New York Bancorp or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.
At the time thisarticle was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.