Would Warren Buffett Buy StarHub?

Over the years, Warren Buffett – arguably the greatest investor in our lifetime – has openly discussed his personal style of investing. So much has he revealed about himself that it is almost possible to categorise the numerous shares in the stock market into those that he would warm to and those that he wouldn’t touch with a bargepole.

So how would StarHub (SGX: CC3) figure in Buffett’s estimation?

Warren Buffett likes stocks that have stable earnings. This is an attribute that StarHub exhibits in spades. If anything, earnings at the telecom company might even be a bit too stable. Over the last five years, net income at Singapore’s second-largest telecom company has been clustered around S$310m with a low of S$263m and a high of S$359m.

StarHub also exhibits a reasonably high margin, which is another of Buffett’s likely selection criteria. Its Net Income Margin of 15% is on a par with other Singapore blue chip stocks. It implies that StarHub could generate $15 of bottom-line profit for every $100 of top-line sales. By comparison, the average Net Income Margin for the 30 companies that make up the Straits Times Index (SGX: ^STI) is 19%.

Unsurprisingly, Buffett likes efficient companies. In other words he likes companies that can sweat their assets effectively. In that regard StarHub might be considered quite well organised. Its Asset Turnover of 1.4 is nearly three times better than the market average. It suggests that the telecom provider is able to generate $1.40 of sales for every dollar employed in the business. Singapore’s largest telecom company, SingTel (SGX: Z74), in contrast, generates around $0.50 for every dollar of asset.

Another of Buffett’s selection criteria is low specific stock volatility. Put another way, he tends to look for companies with low specific stock risk. That is a fancy way of saying he doesn’t mind stock volatility provided it is due to macroeconomic factors. StarHub’s share price volatility is 16%. The average volatility for Singapore blue chips is 18%, and Buffett’s favourite stock, Coca-Cola (NYSE: KO), has a share price volatility of 15%.

Buffett is not a huge fan of companies that are exposed to macroeconomic risk. In other words he is unlikely to be enamoured by businesses that use excessive borrowings, which could make a company vulnerable to interest-rate hikes. StarHub is highly leveraged. Its Leverage Ratio of 41 is over 20 times higher than the market average.

On balance, StarHub is unlikely to appear on Buffett’s radar. It scores well on a number of measures but it might need to cut its debt burden significantly to appeal.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.