For investors aiming to create a durable, long-term portfolio, the ideas of quality investing present a useful structure. This method centers on finding companies with lasting competitive strengths, sound financial condition, and the capacity to produce steady, superior earnings through different economic periods. A functional instrument for this hunt is the "Caviar Cruise" stock screen, a process shaped by quality investing beliefs. It selects for companies displaying solid historical revenue and profit increase, high returns on invested capital, sound free cash flow production, and an acceptable debt level. The aim is not to locate temporary discounts, but to point out enterprises constructed to last and increase wealth for shareholders over many years.
One company that appears from using this systematic screen is Cummins Inc. (NYSE:CMI), a worldwide power technology frontrunner. The company’s description indicates it holds many of the basic qualities quality investors look for, making it a subject fit for more detailed examination.
Matching the Central Quality Standards
The Caviar Cruise screen uses particular, measurable filters to judge a company's quality. Cummins seems to match or pass several of these important limits, which are created to find financially sound and well-run businesses.
- High Return on Capital: A central part of quality investing is judging how well a company uses its capital. The screen needs a Return on Invested Capital (leaving out cash, goodwill, and intangibles) over 15%. Cummins states a number of 17.81%, showing it creates good profits from the capital used in its main activities. This points to a lasting competitive benefit and skilled management.
- Managed Financial Leverage: Quality companies finance increase carefully. The screen selects for a Debt-to-Free Cash Flow ratio under 5, meaning it would require less than five years of present cash flow to clear all debt. Cummins’ ratio of 3.17 fits well within this limit, indicating a sound balance sheet and reduced financial danger.
- Steady Historical Increase: The method searches for an established history. The screen requires a 5-year revenue Compound Annual Growth Rate (CAGR) over 5% and EBIT (earnings before interest and tax) increase greater than revenue increase. Cummins displays a revenue CAGR of 8.57% and a notable EBIT CAGR of 16.87%. The reality that profit increase exceeds sales increase is a sign of operational effectiveness and possible pricing strength.
- Superior Earnings: It’s not only about profit on statements, it’s about cash received. The screen requires a 5-year average Profit Quality (Free Cash Flow/Net Income) over 75%. Cummins performs well here with a number of 116.63%, meaning it turns all of its net income into free cash flow and more. This superior cash production gives options for dividends, share repurchases, new investment, or debt decrease.
A View of Basic Condition
A wider view of Cummins’ basic measures, as shown in its detailed fundamental analysis report, gives more background. The report gives Cummins a total score of 6 out of 10, noting both positive points and parts for thought.
The company scores especially high on profitability, with Return on Equity and Return on Invested Capital beating most of its machinery industry competitors. Its dividend description is also called "very good," backed by a consistent 10+ year history of payments and raises, and a maintainable payout ratio.
The financial condition score is average, with a very sound Altman-Z score showing low failure risk and a good Debt-to-FCF ratio, though its liquidity measures are closer to industry norms. On valuation, the stock seems fully valued compared to present earnings, which is typical for quality companies, though future increase projections may help explain the higher price. The increase analysis confirms solid historical EPS increase and positive analyst forecasts for coming years.
Investment Case and Points for Thought
For a quality investor, Cummins offers a case founded on industrial history, worldwide size, and financial management. Its capacity to produce high returns on capital and better free cash flow matches well with the objective of owning self-sustaining, shareholder-aligned businesses. The company’s current shift toward new power technologies, including electrified powertrains, hydrogen, and fuel cells, indicates an attempt to adjust its competitive strengths for a world reducing carbon—a main point for thought for long-term importance.
Still, quality investing also includes knowing risks and price. Cummins works in changing end markets, and its recent revenue decrease shows this vulnerability. While its balance sheet is sound, the valuation is not low, needing an investor to believe in its long-term increase path to accept the present cost. The quality structure stresses buying at a reasonable price, not at any price.
Finding More Quality Possibilities
Cummins Inc. shows how the Caviar Cruise screen can find companies with quality features. Investors curious about using this process to locate other possible subjects can use the Caviar Cruise screen on their own.
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or an offer to buy or sell any security. Investing includes risk, including the possible loss of original capital. You should do your own study and talk with a certified financial consultant before making any investment choices.
