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 Vale (NYSE: VALE ) -- 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 this series, we do just that.
Writing in a 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 Vale 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 Vale's earnings and free cash flow history:
Source: S&P Capital IQ.
Although revenues plunged during the global financial crisis that hit so many commodities businesses, Vale's earnings have risen considerably over the past five years, largely helped by a major acquisitive and capital investment streak.
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.
Vale generates a strong return on equity -- 30% over the past year, 27% on average over the past five years -- while employing a modest debt-to-equity ratio of 33%.
CEO Murilo de Oliveira Ferreira took over the job last May, after the Brazilian government criticized his predecessor for not investing enough at home. Prior to taking over, he'd worked in other mining positions for a few decades, including in Vale's aluminum and Canadian nickel divisions from 1998 to 2008.
Mining and fertilizers aren't particularly susceptible to technological disruption.
The Foolish conclusion
So is Vale a Buffett stock? Possibly. Its CEO is quite new to the position, though the company exhibits several of the quintessential characteristics of a Buffett investment: consistent earnings, high returns on equity with limited debt, and a straightforward business. If you're interested in a stock that our top analysts and chief investment officer picked to beat the market, you can check out "The Motley Fool's Top Stock for 2012." I invite you to download this special report for a limited time by clicking here -- it's free.