Is CSX a Buffett Stock?

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.

In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:

  1. Consistent earnings power.
  2. Good returns on equity with limited or no debt.
  3. Management in place.
  4. 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.

Company

Debt-to-Equity Ratio

Return on Equity

5-Year Average Return on Equity

CSX 93% 19% 16%
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.

3. Management
CEO Michael Ward has been at the job since 2003.

4. Business
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.

If you'd like to stay up-to-speed on the top news and analysis on CSX or any other stock, simply click here to add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks by clicking here.

Ilan Moscovitz doesn't own shares of any companies mentioned. You can follow him on Twitter @TMFDada. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 20, 2011, at 12:21 PM, midnightmoney wrote:

    Isn't Michael Ward the CEO of CSX?

  • Report this Comment On June 20, 2011, at 1:01 PM, TMFKris wrote:

    @midnightmoney

    We've fixed the mistake. Thanks for pointing it out.

    TMF Kris - TMF copy editor

  • Report this Comment On June 20, 2011, at 1:56 PM, tkg29 wrote:

    Sentimentally, Ive always liked CSX's roots.

    Back in the dark days of the late 60's when railroads were viewed as a dying industry, C&O under Walter Touhy was making a profit and propping up its weak big sister, B&O. As Chessy System grew merged with other roads it never lost the old C&O's eye for the dollar and efficient profitability.

  • Report this Comment On June 20, 2011, at 7:04 PM, jowine wrote:

    I hired in 1961 afer the C&O bought the P.M. thier were no dark days. Under who? we all were the boss he just got more money.I was Company & Union,the B.O. Had money and track connections. Then CHESSIE got woke up by PEAKEE then they the CHESSIE SYSTEM BOUGHT tthe family lines Only dark side was the F.E.C. When sell the short haul to short lines and the goods come back to you,and you have the long haul $$$. Then comes the CSX that's world with no end.COAL--COAL--GRAIN--CHEMICAL'S CONNECTION'S--CONNECTION'S.

  • Report this Comment On June 21, 2011, at 1:31 PM, tkg29 wrote:

    I was with the B&O then and things were looking dark that side of the house. They had some cash, and connections in the coal fields alright, but a humongus debt. Lucky for them the C&O won the fight for control over the NYC who went to their doom with ill fated Pennsy merger.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1509453, ~/Articles/ArticleHandler.aspx, 9/20/2014 2:07:59 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement