For investors aiming to assemble a portfolio of lasting, high-achieving businesses, the ideas of quality investing offer a useful framework. This method centers on finding companies with durable competitive strengths, reliable earnings, sound finances, and the capacity to produce high returns on capital over many years. One organized way to find these companies is the "Caviar Cruise" stock screen, which uses a set of strict, measurable filters to separate firms displaying these key features of quality.
A recent use of this screen has brought attention to Celestica Inc (NYSE:CLS), a worldwide supplier of supply chain solutions and electronics manufacturing services. The company's presence in the screen implies its financial standing matches the strict criteria used by investors focused on quality.
Matching the Main Standards for Quality
The Caviar Cruise method focuses on a number of important financial measures, each intended to assess a separate part of a company's operational strength and financial soundness. Celestica's present data indicates a close match with these standards.
- High Return on Invested Capital (ROIC): A central part of quality investing, ROIC calculates how well a company produces earnings from its capital. The screen demands a ROIC (leaving out cash, goodwill, and intangibles) over 15%. Celestica greatly surpasses this, with a present ROICexgc of 38.37%. This shows the company is very effective at using capital to build value, a mark of a lasting competitive edge and able management.
- Strong Profit Growth: The strategy searches for companies where profit growth is faster than sales growth, pointing to better operational efficiency and pricing ability. While a 5-year sales CAGR is not in the given data, Celestica's 5-year EBIT (Earnings Before Interest and Taxes) CAGR is a notable 54.91%. This fast rise in core operating profit indicates major margin improvement and benefits from increased scale.
- Sound Financial Condition: To confirm stability, the screen selects for companies with acceptable debt levels compared to their cash production. The Debt-to-Free Cash Flow ratio should be under 5, meaning it would require fewer than five years to clear all debt using current cash flow. Celestica's ratio of 1.69 is very good, showing a solid balance sheet and limited financial danger.
- Reliable Earnings: The "Profit Quality" measure contrasts free cash flow with net income, showing how much accounting profit becomes actual, usable cash. A 5-year average above 75% is needed. Celestica's average of 101.20% is excellent, indicating that its stated profits are completely supported by cash flow. This lessens the need for outside funding and allows for dividends, share repurchases, or new investment.
A Summary of Basic Strength
An examination of Celestica's wider fundamental analysis report supports the view from the screen. The report gives CLS a good total rating of 7 out of 10, with especially high marks in Profitability (8) and Financial Health (8). Important points from the report are:
- Notable Profitability: The company's Return on Equity (37.56%) and Return on Assets (11.54%) are in the highest ranges of its industry. Both operating and profit margins have seen steady gains in recent periods.
- Increasing Growth: Celestica is in a phase of fast growth. Sales rose 28.46% in the last year, and analysts estimate yearly sales growth of about 36.47% in the future. Earnings per share (EPS) growth is also strong, with a 54.59% gain last year and good future estimates.
- Valuation Note: The report states that Celestica sells at a higher price based on standard P/E measures, which is typical for fast-growing, high-caliber companies. Still, this may be supported by its exceptional profitability and quickening growth rates. The PEG ratio, which includes growth, points to a more moderate valuation.
Is Celestica a Quality Investment Prospect?
Judging by the measurable filters of the Caviar Cruise screen and its fundamental report, Celestica makes a strong argument for quality investors. The company shows the necessary characteristics the strategy looks for: outstanding returns on capital, fast profit growth, a very strong balance sheet with little debt load, and earnings of the best cash-based reliability. Its work in Advanced Technology Solutions and Connectivity & Cloud Solutions also places it inside long-term growth areas like digital change and aerospace advancement.
However, quality investing also includes a non-measurable review of a company's competitive barrier, leadership, and industry standing, elements a screen cannot cover. Also, its present price needs thoughtful study, as paying too much can reduce long-term gains.
For investors wanting to review other companies that meet similar strict quality tests, the Caviar Cruise screen can be a useful first step. You can see and adjust the screen to perform your own study here.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any securities. The information shown is from supplied data and should not be the only reason for an investment choice. Investors should do their own research and talk with a qualified financial advisor before making any investment decisions.