For investors looking to assemble a collection of lasting, high-achieving businesses, the quality investing philosophy offers a useful framework. This method centers on finding companies with durable competitive strengths, sound financial condition, and the capacity to produce high returns on capital over many years. Instead of searching for steep discounts, quality investors frequently accept a reasonable price for outstanding businesses they can hold for a long time. One organized way to find these companies is the "Caviar Cruise" stock screen, which uses a strict group of numerical filters for sales growth, earnings, capital use, and financial soundness.
A recent run of this screen highlighted TopBuild Corp. (NYSE:BLD), a primary installer and distributor of insulation and other construction products in the U.S. and Canada. A detailed look at its financial numbers shows why it meets the requirements as a possible choice for portfolios focused on quality.
Fulfilling the Main Quality Standards
The Caviar Cruise screen rests on several basic supports. TopBuild's financial results show solid performance in these important categories:
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Continued Growth: The screen demands at least a 5% compound annual growth rate (CAGR) for both sales and EBIT (earnings before interest and taxes) over five years. TopBuild passes these limits easily, with a sales CAGR of 6.3% and a notable EBIT CAGR of 25.9%. Significantly, the reality that EBIT growth greatly exceeds sales growth is a key screen rule. This points to meaningful operating leverage and gaining profitability, implying the company gains from economies of scale and has pricing strength.
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Outstanding Capital Use: A main belief of quality investing is assessing how effectively a company uses its capital. The screen requires a high Return on Invested Capital (ROIC), specifically leaving out cash and goodwill to concentrate on core operating assets. TopBuild's ROIC on this measure is a very high 67.8%, well above the 15% minimum. This shows management is very skilled at creating earnings from the capital used in the business.
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Sound Financial Condition and Cash Generation: Quality companies are not only profitable but also financially stable. The screen assesses debt compared to free cash flow (FCF), with a ratio under 5 seen as sound. TopBuild's Debt/FCF ratio of 3.6 implies it could in theory pay off all its debt with under four years of present cash flow, pointing to acceptable leverage. Also, the screen searches for high "profit quality," calculated as the part of net income turned into free cash flow. TopBuild's five-year average of 110.5% is above the 75% filter, demonstrating it produces more cash than its accounting earnings would indicate, a signal of a strong and effective business model.
Fundamental Condition Review
A wider assessment of TopBuild's fundamental picture, as explained in its detailed analysis report, supports the screen's results. The company receives high scores for earnings and health. Its profit and operating margins are in the highest tier of its industry and have displayed steady gain. Liquidity is also sound, with a quick ratio pointing to no trouble in meeting near-term needs.
The report mentions two points for thought. First, the stock's price appears high compared to its industry group, trading at a premium on price-to-earnings and enterprise-value-to-EBITDA measures. Second, while long-term growth patterns are good, recent year-over-year numbers for sales and EPS have weakened, and future growth projections are more measured than the fast rate of the past five years.
A Quality Picture in Building Products
TopBuild's business design fits well with the non-numerical traits quality investors commonly want. It works in a split industry, letting a capable leader take market share. Its two-part method, installation and specialty distribution, forms a service-focused, value-adding system for contractors. While the business is cyclical and linked to building activity, its attention to both new construction and repair/remodeling gives some variety. The necessary character of insulation, supported by lasting trends in energy savings and building rules, backs a stable demand picture.
Locating Other Quality Choices
TopBuild shows the kind of company a strict quality screen can find, one with a record of profitable growth, excellent capital returns, and firm financial standing. For investors wanting to use this process to discover other possible choices, the Caviar Cruise screen is ready to use and adjust.
You can see and run the full Caviar Cruise stock screen here.
Disclaimer: This article is for information only and does not form financial guidance, a suggestion, or an offer to buy or sell any security. The information shown is based on supplied data and should not be the only foundation for an investment choice. Investors should perform their own research and talk with a qualified financial advisor before making any investment.