Applied Industrial Technologies Inc (NYSE:AIT) Passes the Caviar Cruise Quality Investing Screen

In the world of quality investing, the focus is on identifying companies with durable competitive advantages, strong financial health, and consistent growth, businesses that can be held for the long term. One method for finding such opportunities is the Caviar Cruise stock screen, inspired by the principles of quality investing and made to filter for firms with superior operational performance, profitability, and financial stability. This screen highlights metrics like revenue and EBIT growth, high returns on invested capital, manageable debt levels relative to cash flow, and high-quality earnings. Today, we look at Applied Industrial Technologies Inc (NYSE:AIT), a distributor of industrial parts and services, which recently appeared through this screening process.

Applied Industrial Technologies shows several characteristics that fit the Caviar Cruise quality investing criteria. A key part of the screen is a minimum 5% annual growth in both revenue and EBIT over a five-year period. While the company’s five-year revenue growth figure was not available in the latest data, its EBIT growth is at a notable 16.83%, greatly exceeding the threshold. This points to strong operational performance and a capacity to increase profitability faster than top-line growth, a sign of pricing power and operational efficiency that quality investors look for.

Another important measure in the screen is return on invested capital excluding cash, goodwill, and intangibles (ROICexgc), with a minimum requirement of 15%. Applied Industrial Technologies performs very well here, reporting a ROICexgc of 32.03%. This metric is important because it shows how well a company produces returns from the capital invested in its core operations, leaving out non-operational assets. A high ROIC frequently indicates a sustainable competitive advantage and good capital allocation, both signs of a quality enterprise.

Debt management is also examined in the Caviar Cruise methodology, with a preference for companies whose total debt is less than five times their free cash flow. Applied Industrial Technologies shows notable strength here, with a debt-to-free-cash-flow ratio of 1.23. This suggests the company could pay off all its outstanding debt in just over a year using its current cash flow, indicating financial resilience and lowering risk for long-term investors.

Profit quality, measured as the five-year average ratio of free cash flow to net income, is another filter, set at a minimum of 75%. Applied Industrial Technologies greatly exceeds this, with a figure of 104.31%, showing that it turns net income into cash even more effectively than accounting profits would imply. High profit quality lessens dependence on external financing and aids sustainable dividends, share buybacks, or reinvestment, all positive traits for quality-focused portfolios.

Beyond the specific screen criteria, a wider review of the company’s fundamentals supports its appeal. According to its fundamental analysis report, Applied Industrial Technologies receives a good rating of 7 out of 10, with especially high scores in profitability and financial health. The report notes very good returns on assets and equity, improving margins, and sound liquidity and solvency metrics. Although the stock is seen as expensive on some valuation measures, its high profitability and stability could support the premium for quality investors, who frequently favor business strength over low prices.

It is important to note that the Caviar Cruise screen also has a stricter version with extra filters, such as improving margins and positive analyst growth expectations. While Applied Industrial Technologies may not satisfy every advanced criterion, its performance on the base screen, along with strong fundamentals, makes it an interesting candidate for more research by investors looking for quality.

For those wanting to find other companies that meet similar criteria, the Caviar Cruise screen is available here. The screen can be adjusted to match different risk tolerances and investment horizons.

In summary, Applied Industrial Technologies displays many attributes valued by quality investors: high returns on capital, strong cash flow generation, low debt, and a history of profitability. While valuation may cause some hesitation, the company’s operational excellence and financial health make it a significant prospect for more due diligence within a long-term, quality-focused strategy.

Disclaimer: This article is for informational purposes only and does not constitute investment advice. Investors should conduct their own research and consult with a financial advisor before making any investment decisions.