Would Warren Buffett Buy Del Monte Pacific?

DelMonteLogoYou have to hand it to Del Monte Pacific (SGX: D03). The company knows what it wants and it is not afraid to go out and get it. But would its strong sense for self-determination cut any ice with Warren Buffett?

Del Monte Pacific is a much bigger company today than it was a just couple of months ago. The reason is because the Philippine-based fruit and vegetable canner has completed its S$2.1 billion purchase of a consumer food business from its American namesake Del Monte Corporation.

The enlarged company with revenues of S$2.5 billion is likely to interest Buffett more than when its sales were some four times lower. Additionally, if Del Monte Pacific can successfully bed down its acquisition then the company could have every chance of becoming a key player in the global food production industry.

Del Monte Pacific has a good track record of low earnings volatility, which is something that Buffett likes to see. Since 1998, operating income has been boringly steady at S$59m. Last year, operating income came in at S$63m. The year before that, it was S$61m.

However, the same cannot be said of its Net Income, which has been all over the place. What’s more, the company’s Net Income Margin has shown worrying signs of shrinkage. In 1998, Del Monte Pacific boasted a high Net Income Margin of some 19%. But by 2013, it had shrunk to just 3%.

That said, Del Monte Pacific is quite efficient, which is likely to impress Buffett. The company Asset Turnover is an impressive 0.9. This suggests that it generated 90 cents of revenue for every dollar of asset employed in the business. This compares well with, say, European food titan Unilever (LSE: ULVR), which generates $1.1 for every dollar of asset used in the business.

Warren Buffett also likes companies with low financial gearing. Or put another way, he likes companies that are not exposed to macroeconomic risks. Del Monte Pacific does not figure too highly on this score. Its Leverage Ratio of 2.7 is almost 70% higher than the median value for Singapore’s 30 Straits Times Index (SGX: ^STI) companies.

Del Monte Pacific has a number of qualities that could interest Warren Buffett. However, it also has some unappetising attributes too. Most notably, its Price to Book ratio is an unappealing 2.7. That could prove to be a deal-breaker as far as Buffett is concerned.

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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.