Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, 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 US Steel
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 US 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 US Steel'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.
US Steel's earnings took a hit during the recession and have yet to fully 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 actually 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 |
|---|---|---|---|
| US Steel | 96% | (10%) | 11% |
|
Alcoa |
50% | 5% | 7% |
|
Nucor |
58% | 5% | 21% |
|
AK Steel |
116% | (17%) | 8% |
Source: Capital IQ, a division of Standard & Poor's.
US Steel doesn't appear to be generating incredibly high returns on equity. Its debt level is on the higher end of its peers'.
3. Management
CEO John Surma Jr. has been at the job since 2004.
4. Business
Steel production isn't particularly susceptible to rapid technological disruption, though it's worth noting that disruption can (and has) occurred in the industry over longer time frames.
The Foolish conclusion
Regardless of whether Buffett would ever buy US Steel, we've learned that, while it has tenured management, it doesn't particularly exhibit the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt.
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