Is Freeport-McMoRan a Buffett Stock?

As the world's third-richest person and most celebrated investor, Warren Buffett attracts a lot of attention. 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 Freeport-McMoRan (NYSE: FCX  ) -- 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 Freeport-McMoRan 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 Freeport-McMoRan'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.

Freeport-McMoRan's earnings have been somewhat volatile over the past several years, though they've generally been growing. (The big loss in 2008 was mostly due to an asset writedown.)

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 among 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

Return on Equity (LTM)

Return on Equity (5-year average)

Freeport-McMoRan 21% 48% 21%
Newmont Mining (NYSE: NEM  ) 25% 21% 12%
Southern Copper (Nasdaq: SCCO  ) 68% 51% 44%
Teck Resources (NYSE: TCK  ) 28% 12% 21%

Source: Capital IQ, a division of Standard & Poor's.

Freeport-McMoRan tends to generate a high return on equity while employing modest debt.

3. Management
CEO Richard Adkerson has been at the job since 2003. Prior to that, he served as a president of the company and its CFO.

4. Business
Copper and gold mining isn't particularly susceptible to technological disruption, though the prices those metals can fetch can be fairly cyclical.

The Foolish conclusion
Regardless of whether Buffett would ever buy Freeport-McMoRan, we've learned that the company exhibits many of the characteristics of a quintessential Buffett investment: more-or-less consistent earnings, high returns on equity with limited debt, tenured management, and a straightforward industry.

If you'd like to stay up to speed on the top news and analysis on Freeport-McMoRan 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.


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