Would Warren Buffett, the world's greatest investor, buy Sydney Airport Holdings Ltd (ASX: SYD) shares today?
While we may never know for sure, I'll quickly run Sydney Airport Holdings shares through the Buffett-Munger four-part checklist. It was this — simple — stock picking checklist which Charlie Munger (Buffett's investing partner) revealed in a 2009 interview with the BBC.
1. They must be capable of understanding the business.
Sydney Airport Holdings owns Australia's busiest international airport, in Australia's biggest city. The company generates around 40% of its revenue from aeronautical services, which includes the fee paid by passengers arriving and departing through the airport. It also makes bucket loads of money via its retail store sales, car rental, parking and security.
Given his ownership of airline stocks, I think Buffett could easily understand Sydney Airport's business. It gets a tick for this part.
2. The business must have a durable competitive advantage.
With investments in companies like Apple Inc and Heinz, Buffett and Munger only buy shares of companies with a lasting advantage over the competition. This can come through things like a powerful brand or market share.
Airports are quite difficult to replicate because they cost billions of dollars to create and the location of the airport plays a massive part in its success. However, Sydney is expected to house a second airport sometime in the next decade.
Sydney Airport Holdings has been given first shot at quoting for the development and operation of the new Western Sydney Airport. Investors are concerned, however, that they may overpay for the development. On the other hand, if they pass up the opportunity to develop the second airport they may miss their chance to keep a hold of the lucrative Sydney travel market.
3. Management must have integrity and talent.
This one sounds simple enough — don't buy shares in companies that are run by tyrants. Sydney Airport Holdings' CEO Kerrie Mather has been in office for many years and holds a big stake in the company. She has been instrumental in the business' success to date and her skin in the game ensures that her interests are aligned with shareholders. The company gets a tick here.
4. "The price must make sense." At today's prices, Sydney Airport Holdings shares appear to be good value, with a 5.3% dividend yield. However, Buffett and Munger have forged their reputation by buying great companies at good prices. For that reason, I think Buffett would hold off buying the company's shares today and wait for a better opportunity.
At today's prices, Sydney Airport Holdings shares appear to be good value, with a 5.3% dividend yield. However, Buffett and Munger have forged their reputation by buying great companies at good prices. For that reason, I think Buffett would hold off buying the company's shares today and wait for a better opportunity.
Foolish Takeaway
In my opinion, using this four-part checklist, it would appear Buffett might not buy Sydney Airport Holdings shares today because of the uncertainty around its competitive advantage and valuation. However, we should remember this assessment is really only somewhat of an educated guess. Much more goes into their assessment than a two-minute overview of a company.
