Quality investing focuses on companies with durable competitive advantages, consistent profitability, and strong financial discipline, businesses you could theoretically hold for decades. The Caviar Cruise screen, inspired by Luc Kroeze’s “The Caviar Formula,” operationalizes this approach by screening for firms that combine steady growth, high returns on capital, and solid financial health. BorgWarner Inc (NYSE:BWA) emerges as a strong candidate from this screen, and the data supports why.
Why BorgWarner Qualifies for Quality Investing
The Caviar Cruise screen is built around several non-negotiable criteria, and BorgWarner ticks most of the boxes with flying colors. Let’s walk through the key filters and how the company measures up.
Revenue and EBIT Growth
Quality investors want evidence of real, sustainable expansion. The screen requires:
- Revenue growth (5Y CAGR) > 5%
- EBIT growth (5Y CAGR) > 5%
- EBIT growth > Revenue growth (indicating improving profitability)
BorgWarner’s numbers tell a nuanced story here. Its revenue growth over the past five years stands at 4.36% —just shy of the 5% threshold. However, its EBIT growth of 9.57% not only exceeds the 5% minimum but also comfortably outpaces revenue growth. This gap suggests the company is benefiting from economies of scale or pricing power, even if top-line expansion has been modest. For a quality investor, the improving core profitability is a strong signal that the business model is becoming more efficient.
Return on Invested Capital (ROIC) > 15%
ROIC is arguably the most important metric in quality investing. It measures how effectively a company turns invested capital into profit. Using the strictest variant—which excludes cash, goodwill, and intangibles—BorgWarner posts an ROIC of 18.28%. That’s well above the screen’s 15% hurdle, placing the company in the top tier of its industry. High and stable ROICs often point to competitive advantages, such as proprietary technology or customer relationships, that competitors find hard to replicate.
Debt-to-Free Cash Flow < 5x
Quality companies should not be drowning in debt. The screen compares total debt to free cash flow (FCF) to see how many years of cash flow it would take to repay all obligations. BorgWarner’s Debt/FCF ratio is 3.31—comfortably under the 5x limit. This indicates a manageable debt load that does not threaten the company’s long-term stability or its ability to reinvest in the business.
Profit Quality > 75% (5-Year Average)
Profit quality measures how much of net income is actually converted into free cash flow. A ratio above 100% means cash generation exceeds reported earnings, a sign of conservative accounting and strong cash conversion. BorgWarner’s profit quality averages a remarkable 182.47% over the past five years. This suggests the company’s earnings are of very high quality—every dollar of net profit produces nearly $1.82 in free cash flow. For a quality investor, this reduces the risk that reported profits are inflated by non-cash items.
Additional Strict Filters
The advanced version of the Caviar Cruise screen also looks for improving profitability over time—specifically that operating margin, profit margin, and ROIC have all trended higher over the past five years. While the full fundamental report shows a slight decline in profit margin recently, the operating margin has grown nicely, and the ROIC has improved in the last year, rising from a three-year average of 9.12% to 9.98%. This directional improvement aligns with the quality investor’s desire for businesses that get stronger, not weaker, over time.
Fundamental Report Summary
BorgWarner earns a fundamental rating of 6 out of 10 from our analysis. The standout areas are profitability (score of 7) and health (score of 7), both ranking near the top of its industry in the Automobile Components sector.
- Profitability highlights: The company’s ROIC of 9.98% outperforms 88.10% of industry peers. Operating margin of 10.21% also ranks in the top quartile.
- Health highlights: Debt-to-FCF of 3.31 is excellent, and the Altman-Z score of 3.20 signals no bankruptcy risk. The current ratio of 2.07 shows ample liquidity.
- Valuation, however, is where value-conscious investors might perk up. With a P/E ratio of 11.46, BorgWarner is cheaper than 80.95% of its industry peers and well below the S&P500 average of 27.42. The forward P/E of 10.68 further reinforces that the stock is priced for modest expectations.
- Growth scores lower at 4, reflecting decelerating growth rates. Past EPS growth averaged 12.79% annually, but future expectations drop to about 6.24%. Revenue growth is also expected to slow. This is a common trade-off in quality investing: you pay for stability and profitability, not hypergrowth.
For a detailed breakdown of all underlying metrics, the full fundamental report is available here.
Analyst Views and Market Context
The broader market backdrop is favorable. The S&P500’s long-term trend remains positive, and the short-term trend is also positive, which supports equity valuations. BorgWarner’s cheap valuation relative to the market and its industry suggests that if the company can maintain its profitability trajectory, there is room for upside. However, the slowing growth expectations warrant caution—analysts may be pricing in headwinds from the transition to electric vehicles and cyclical auto demand.
Find More Quality Candidates
The Caviar Cruise screen is designed to surface companies like BorgWarner that combine strong fundamentals with disciplined financial management. If you are looking to build or expand a quality-focused portfolio, the screen can help you identify other candidates worth researching. You can explore the full list of results and customize the filters to your preferences by visiting our stock screener.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. Always conduct your own research or consult with a financial advisor before making investment decisions.