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 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: S&P Capital IQ.
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 because of 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-to-equity ratio, 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 |
|---|---|---|---|
| Freeport-McMoRan | 19% | 35% | 15% |
| Newmont Mining | 25% | 20% | 12% |
| Southern Copper | 68% | 59% | 45% |
| Teck Resources | 39% | 16% | 15% |
Source: S&P Capital IQ.
Copper prices did plunge in 2009, but they're back near pre-crisis highs of around $4 per pound. Meanwhile, gold is still relatively close to its multidecade high. With demand for both metals at historically strong levels, copper and gold miners have been producing at big returns on equity. While all four of these companies score well on this front, Freeport and Southern Copper appear to be generating the highest returns on equity, even taking into account Southern's comparatively high debt-to-equity ratio.
3. Management
CEO Richard Adkerson has been at the job since 2003. Prior to that, he served as a president of the company and was its CFO.
4. Business
Copper and gold mining isn't particularly susceptible to technological disruption, though the prices those metals can fetch can be quite cyclical.
The Foolish conclusion
So is Freeport-McMoRan a Buffett stock? It could very well be. Despite the fact that Buffett doesn't tend to invest in non-energy commodity producers, the company does exhibit many of the characteristics of a quintessential Buffett investment: more-or-less consistent earnings, high returns on equity, tenured management, and a technologically straightforward business. To stay up to speed on Freeport-McMoRan'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 by clicking here.
