Is DryShips 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 DryShips (NYS: DRYS) -- 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.
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does DryShips 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 DryShips' 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 at least the past five years, DryShips' earnings and free cash flow have been volatile due to rocky shipping demand.
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.
Return on Equity (LTM)
Return on Equity (5-Year Average)
Navios Maritime Partners (NYS: NMM)
Diana Shipping (NYS: DSX)
Excel Maritime (NYS: EXM)
Source: Capital IQ, a division of Standard & Poor's.
DryShips generated lower returns on equity than its peers while employing slightly more debt.
CEO George Economou has been at the job since 2004. Prior to that, he was a superintendent engineer at Thenamaris Ship Management and founded Cardiff Marine in 1986.
Dry bulk carriers and drilling rigs aren't particularly susceptible to technological disruption, though the industry can be subject to a fair bit of cyclicality, as we've seen.
The Foolish conclusion
Regardless of whether Buffett would ever buy DryShips, we've learned that while the company has tenured management and operates in a straightforward industry, it doesn't particularly 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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At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter@TMFDada. 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.
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