For investors aiming to assemble a portfolio of durable, high-achieving companies for the long term, the principles of quality investing offer a useful framework. This method centers on finding businesses with lasting competitive strengths, solid profitability, and sound financial condition, with the plan of owning them for many years. One organized way to find these companies is the "Caviar Cruise" stock screen, which selects for firms with better-than-average historical revenue and profit increases, high returns on invested capital, strong cash flow production, and reasonable debt. The screen tries to distinguish truly outstanding businesses from the wider market.
A recent run of this screen highlighted Cummins Inc. (NYSE:CMI) as a candidate for more detailed review. As a global frontrunner in power technology, Cummins designs and produces diesel, natural gas, electric, and hydrogen powertrains and related parts. We can look at how its financial profile matches the main ideas of quality investing.
Matching the Main Quality Standards
The Caviar Cruise screen uses several measurable filters to judge a company's quality. Cummins satisfies or surpasses these important measures:
- Continued Increase: The method requires a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Cummins shows a 5.43% revenue CAGR and a higher 7.91% EBIT CAGR. Significantly, its EBIT increase is faster than its revenue increase, an indicator of better operational efficiency and possible pricing strength, exactly the type of profitable growth quality investors look for.
- Outstanding Capital Use: A key part of quality investing is a high return on invested capital (ROIC), which gauges how well a company produces profits from its capital. The screen asks for a ROIC (leaving out cash and goodwill) over 15%. Cummins performs well here with a number of 15.85%, showing it produces significant value from each dollar put into its business.
- Sound Financial Condition & Cash Flow: Quality companies do not carry too much debt. The screen employs the Debt-to-Free Cash Flow (FCF) ratio, looking for a number under 5, which indicates how many years of present cash flow would be required to settle all debt. Cummins’ ratio of 3.34 fits well within this limit, pointing to a good ability to handle its debts. Also, its average "Profit Quality" over five years is a notable 123.85%, meaning it turns more than 100% of its net income into free cash flow. This shows very high earnings reliability and supplies plenty of cash for dividends, share repurchases, or new investment.
A Summary of Cummins' Basic Profile
A look at Cummins' wider fundamental analysis report gives a more detailed view that mainly agrees with the quality argument. The report gives CMI a total score of 5 out of 10, showing a varied but encouraging profile.
- Profitability is a Definite Plus: With a score of 7/10, this is Cummins' best area. It displays better returns on equity and assets than many industry competitors, and both its profit and operating margins are higher than average. The latest ROIC is also above its three-year average, a good direction.
- Dividend Profile is Steady: The dividend score is 7/10. Cummins has a consistent history of paying and raising its dividend for more than ten years, with a maintainable payout ratio. The present yield is fair, though not very high.
- Financial Condition is Satisfactory: Scoring 5/10, the company's stability is firm, helped by a good Altman-Z score and the positive Debt/FCF ratio mentioned before. Some liquidity measures, however, are not as strong as industry competitors.
- Valuation and Increase Raise Points: The valuation score of 3/10 implies the stock is not low-priced, trading at a higher level than some industry measures. The growth score of 4/10 is moderated by a small revenue drop last year, though good future EPS increase above 15% is forecast. This matches the screen's finding that analysts predict future increase will continue.
Is Cummins a Quality Investment?
Cummins Inc. makes a strong argument for quality investors. It meets the requirements of a strict screen made to find companies with a record of profitable increase, excellent capital use, and solid balance sheets. Its high ROIC and notable cash flow conversion are signs of a well-managed business with a competitive edge. For investors concentrated on the long term, these are important qualities that can lead to compounding gains.
However, the fundamental analysis notes areas for careful review. The present valuation may cause some hesitation, needing confidence in the company's capacity to manage its shift into new power technologies like hydrogen and electrification to support the price. The modest near-term revenue increase forecasts also suggest this may be a case of performance and margin betterment rather than rapid top-line growth.
Find Other Quality Candidates The Caviar Cruise screen can assist in finding other companies that share these strong financial traits. You can see the present screen outcomes and change the settings for your own study here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any securities. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.
