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
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:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- 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 |
25% | 21% | 12% |
|
Southern Copper |
68% | 51% | 44% |
|
Teck Resources |
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.
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