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What would Buffett do?

What if the “Oracle of Omaha” were actually the “Oracle of Orange”? That is, if Warren Buffett was an Aussie, what local companies might he be interested in buying right now?

Buffett developed his philosophy based on the teachings of the father of value investing, Benjamin Graham (who wrote the seminal The Intelligent Investor in 1949). So we took some of the teachings of Graham, tweaked them slightly for the modern times, and came up with a Graham-inspired screen for the ASX. To pass, a listed company must have all the following:

■ Price-earnings ratio below 15 times;

■ Price to book (P/B) value of less than 1.5;

■ A current ratio (current assets divided by current liabilities) greater than 2;

■ A five-year compound average growth rate in earnings per share of above 3 per cent;

■ A five-year history of dividend payments, with positive growth over that period;

■ Positive earnings in each of the past five years; and

■ Annual revenue of more than $200 million.

That shouldn’t be so difficult, right? Wrong. A look through S&P Capital IQ leaves a paltry four names: listed law firm Slater & Gordon; out of favour engineering contractor Bradken; little-known residential and commercial property developer (primarily in Australia and Malaysia) United Overseas Australia; and heavy earthmoving equipment hire company Emeco Holdings.

Bradken and Emeco are offering hefty yields, but are they in value or are they a value trap? Based on broker recommendations, all four score a borderline “sell” or “hold”. Bradken and UOS have the highest returns on equity, but they have been falling.

None appear to have the defensible competitive advantage so beloved by Buffett, so it’s unlikely any would appear in his imagined Australian portfolio. On a P/B measure, only UOS and Emeco have the “margin of safety” that Buffett demands.

That said, investing in a company with cyclically depressed earnings that trades on single-digit PEs can yield big returns. All grist for the investment mill.

Company nameMarket cap ($m)Total revenue ($m)Est. PEP/BCurrent ratioLatest EPS ($)Est. EPS next FY ($)Dividend yield (%)EPS DPS ROE (%)
Slater & Gordon
(SGH) 
327.3 216.4 7.8 1.3 3.6 0.157 0.245 3.13 4.01 8.45 11.4
Bradken Limited
(BKN)
790.4 1456.1 6.7 1.1 2.4 0.598 0.673 8.99 5.48 5.41 14.7
United Overseas Australia
(UOS)
374.6 200.3 4.0 0.6 3.1 0.092 0.094 5.33 20.2 23.4 14.1
Emeco Holdings
(EHL)
292.3 565.2 6.0 0.5 2.4 0.112 0.08 12.4 4.5 11.4 11.2
Notes: EPS is earnings per share before extraordinary items. CAGR is compound annual growth rate. PE is price-earnings ratio. P/B is price to book value. ROE is return on equity. Data source: MyCapital IQ, as at Nov 21, 2012.

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BCI BCIRON $ 2.300 - 6.12%
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