Is CSX a Buffett Stock?

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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 CSX (NYS: CSX) -- 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 CSX 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 CSX's earnings history:

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Source: S&P Capital IQ.Over the past five years, CSX has had fairly stable earnings.

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

CSX97%20%16%
Union Pacific (NYS: UNP) 49%17%13%
Norfolk Southern (NYS: NSC) 67%16%15%
Canadian Pacific Railway (NYS: CP) 84%11%14%

Source: S&P Capital IQ.CSX produces superior returns on equity while employing a bit more debt than its peers.

3. Management
CEO Michael Ward has been at the job since 2003 and has been at the company in various other jobs for a number of years.

4. Business
For years, Buffett had been skeptical of the rail industry's competitive dynamics, though he's come around more recently to the idea that it has an advantage over trucking in a high-fuel-cost environment and acquired Burlington Northern. Rail isn't particularly susceptible to technological disruption.

The Foolish conclusion
Regardless of whether Buffett would ever buy CSX, we've learned that it exhibits many of the characteristics of a quintessential Buffett investment: stable earnings, high returns on equity, tenured management, and a technologically straightforward business.

If you'd like to stay up to speed on the top news and analysis on CSX or 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.

At the time this article was published Ilan Moscovitzdoesn't own shares of any company mentioned.You can follow him on Twitter, where he goes by@TMFDada. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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