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Is ArcelorMittal a Buffett Stock?
by Ilan Moscovitz, The Motley Fool Jan 20th 2012 11:00AM
Updated Jan 20th 2012 11:02AM
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 ArcelorMittal (NYS: MT) -- 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 ArcelorMittal 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 ArcelorMittal's earnings and free cash flow history:
anImage
Source: S&P Capital IQ.
ArcelorMittal has had pretty wild fluctuations in its earnings and free cash flow over the past few years. Of course, this is to be expected of a steel-maker during a global economic downturn.
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
ArcelorMittal 44% 4% 12%
Nucor 56% 9% 21%
Steel Dynamics 101% 11% 20%
POSCO 68% 0% 14%
Source: S&P Capital IQ.
Historically, ArcelorMittal has generated average-to-below-average returns on equity while employing a below-average debt level.
3. Management
CEO Lakshi Mittal has been in charge since he founded the company in 1976.
4. Business
Steel production today isn't particularly susceptible to technological disruption.
The Foolish conclusion
So is ArcelorMittal a Buffett stock? Probably not. While it has tenured management and operates in a technologically straightforward industry, it doesn't exhibit the other characteristics of a quintessential Buffett investment: consistent earnings and high returns on equity with limited debt. However, if you'd like to stay up to speed on ArcelorMittal'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.
At the time this article was published Ilan Moscovitz doesn't own shares of any company mentioned. You can follow him on Twitter @TMFDada. The Motley Fool owns shares of Arcelor Mittal. Motley Fool newsletter services have recommended buying shares of Nucor. 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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