Is Southern Copper 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.

We can't know for sure whether Buffett is about to buy Southern Copper (NYSE: SCCO  ) -- 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:

  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 Southern Copper 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 Southern Copper's earnings and free cash flow history:

Source: S&P Capital IQ.

Southern Copper's earnings have fluctuated over the past five years with the state of the global economy, but the company has managed to remain solidly profitable for more than 15 years.

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

Southern Copper 67% 57% 44%
Freeport-McMoRan 20% 43% 21%
Teck Resources 41% 15% 21%
Newmont Mining 25% 20% 12%

Source: S&P Capital IQ.

Over the past five years, Southern Copper has generated an outrageously high return on equity while employing moderate amounts of debt.

3. Management
CEO Oscar Rocha has been at the job since 2004. Prior to that, he was the company's COO and has held senior positions at Mexicana De Cobre and Mexicana De Cananea, two other mining companies.

4. Business
Copper mining isn't particularly susceptible to wholesale technological disruption, though it can be cyclical and highly subject to commodity price movements.

The Foolish conclusion
Whether Buffett would buy shares of Southern Copper, we've learned that, despite operating in a commodity industry, it exhibits many of the characteristics of a quintessential Buffett investment: consistent earnings, high returns on equity with limited debt, tenured management, and a straightforward business. To stay up to speed on Southern Copper's progress, simply 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 company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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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Related Tickers

7/22/2014 4:00 PM
SCCO $32.63 Up +0.19 +0.59%
Southern Copper Co… CAPS Rating: ****

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