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.
We can't know for sure whether Buffett is about to buy U.S. Steel (NYSE: X ) -- he hasn't specifically mentioned anything about it to me -- but we can discover whether it's the sort of stock that might interest him. Answering that question could also reveal 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:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does U.S. Steel 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 U.S. Steel's earnings and free cash flow history:
Source: S&P Capital IQ.
U.S. Steel's earnings took a bit hit from the recession and have yet to recover.
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 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
|
| U.S. Steel |
94% |
(2%) |
11% |
| Alcoa (NYSE: AA ) |
51% |
7% |
7% |
| Nucor (NYSE: NUE ) |
56% |
9% |
21% |
| AK Steel (NYSE: AKS ) |
153% |
(9%) |
8% |
Source: S&P Capital IQ.
U.S. Steel doesn't seem to be generating very high returns on equity. Its debt-to-equity ratio appears about in line with its peers.
3. Management
CEO John Surma was been at the job since 2004. Before that, he was the company's CFO and COO.
4. Business
Steel production isn't particularly susceptible to rapid technological disruption, though it's worth noting that disruption can occur (and has occurred) in the industry over longer time frames, as was the case of the mini-mills disrupting integrated steel.
The Foolish conclusion
Regardless of whether Buffett would ever buy U.S. Steel, we've learned that while the company has tenured management, it doesn't particularly exhibit many of the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt. That being said, if you'd like to stay up to speed on U.S. Steel's progress, or that of any other stock, simply add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.
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