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Would Warren Buffett Buy Olam International?

Olam-logoWe know that Muddy Waters is unlikely to get a Christmas card from the bosses of Olam International (SGX: O32). But what would Warren Buffett make of the agricultural products company?

Low earnings volatility is something that Warren Buffett likes to pay attention to. Olam’s earnings can be described as not especially volatile, even though it operates in the commodity market, which can be quite unpredictable. Over the last five years, its bottom-line profit has varied by less than 10% around an average value of S$370m.

However, its Net Income Margin is likely to raise an eyebrow or two. In 2010, it was 3.4%. Last year it was 1.7%. Although, the profit margin is roughly in line with the industry average, it is, nevertheless, significantly lower than the average for Singapore’s blue chips. The median value for the 30 companies that make up the Straits Times Index (SGX: ^STI) is around 14%.

Buffett also likes efficient companies. Olam scores well on that front. Its Asset Turnover is nearly three times higher than the average for Singapore’s blue chips. At 1.4, the company is generating $1.40 of revenue for every dollar of asset employed in the business.

Its Return on Equity of 10% is quite commendable too. However, this has been achieved through a higher than average Leverage Ratio. This is likely to concern Buffett, who is mindful of macroeconomic risk. A highly leverage company could be more exposed interest-rate risk. That could help explain Olam’s share-price volatility, which is higher than the market average.

Olam’s current market capitalisation relative to its book value could interest Buffett, though. At a price-to-book of 1.1, Olam does not look too overly expensive. In 2010, it was valued at almost four times its book value.

Olam is an interesting business insofar as it is not a straightforward commodity play. Its vertical integration means that it is involved in sourcing, processing, warehousing, transporting, shipping, distributing and marketing of agricultural products and ingredients. That said, it is still unlikely to interest Buffett unless it can improve its Net Income Margin.

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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.