Is US Airways 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 US Airways (NYS: LCC) -- 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 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 US Airways 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 Airways' earnings and free cash flow history:

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Source: S&P Capital IQ.

US Airways has had pretty wild fluctuations in its earnings and free cash flow over the past few years. Of course, this is to be expected from an airline during an 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.

US Airways generates a huge return on equity -- 69% over the past year -- but that's due to its high debt level -- 28 times equity -- rather than enormous profitability.

3. Management
CEO William Parker has been at the job as far back as 2005. Before that, he helped to run its subsidiary America West for about a decade.

4. Business
Buffett is notoriously bearish on the airlines industry because of its highly competitive and capital-intensive nature.
 
The Foolish conclusion
So is US Airways a Buffett stock? Probably not. Despite its tenured management and technologically straightforward industry, it doesn't exhibit the other quintessential characteristics of a Buffett investment: consistent earnings and high returns on equity with limited debt. However, if you'd like to stay up to speed on US Airways' progress, I suggest adding 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 stock mentioned.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 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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