Editor's Note: A previous version of this article named the wrong person as CEO of CSX.
Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy CSX (NYSE: CSX ) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno mumbo jumbo businesses.
Does CSX meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine CSX's earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over the past five years, CSX has had fairly stable earnings.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
Return on Equity
5-Year Average Return on Equity
|Union Pacific (NYSE: UNP )||51%||16%||13%|
|Norfolk Southern (NYSE: NSC )||64%||15%||15%|
|Canadian Pacific (NYSE: CP )||86%||12%||14%|
Source: Capital IQ, a division of Standard & Poor's. *Negative equity one or more years.
CSX produces above-average returns on equity while employing above-average levels of debt.
CEO Michael Ward has been at the job since 2003.
For years, Buffett had been skeptical of the rail industry's competitive dynamics, though he's come around more recently to the idea that it has an advantage over trucking in a high fuel cost environment and acquired Burlington Northern. Rail isn't particularly susceptible to technological disruption.
The Foolish conclusion
Even though the Burlington Northern purchase would potentially keep Buffett from buying CSX, we've learned that the company exhibits some of the characteristics of a quintessential Buffett investment: consistent earnings, tenured management, and a straightforward business.
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