Cirrus Logic Inc (NASDAQ:CRUS) Passes the Caviar Cruise Quality Investment Screen

The Caviar Cruise investment strategy focuses on identifying companies with durable competitive advantages, strong financial health, and consistent growth, characteristics that define a quality investment. This approach prioritizes businesses that can deliver superior returns on invested capital, exhibit pricing power, and generate high-quality earnings, making them suitable for long-term, buy-and-hold portfolios. The methodology uses a strict screening process to filter for quantifiable metrics that signal operational strength and financial stability.

Cirrus Logic Inc (NASDAQ:CRUS) appears as a noteworthy candidate from this screen. The company, a developer of mixed-signal processing solutions for audio and high-performance applications, displays several attributes that correspond with the quality investing framework.

Meeting the Caviar Cruise Criteria

The Caviar Cruise screen uses a multi-layered filter to isolate high-quality businesses. Cirrus Logic meets or goes beyond the key thresholds set by the strategy's base screen, which forms a solid foundation for further analysis.

• Exceptional Profitability and Returns: A central part of quality investing is efficient capital allocation. The screen requires a Return on Invested Capital (excluding cash and goodwill) above 15%. Cirrus Logic significantly exceeds this with a ROICexgc of 31.75%, indicating the company generates substantial profits from the capital it has invested in its business. This high return is a strong sign of a durable competitive advantage and excellent management execution.
• Superior Earnings Quality: The strategy looks for companies whose accounting profits are supported by real cash flow. This is measured by the Profit Quality ratio, which compares free cash flow to net income. The screen looks for a five-year average above 75%. Cirrus Logic displays noteworthy earnings quality with a ratio of 123.3%, meaning it converts more than 100% of its net income into free cash flow. This provides significant financial flexibility for strategic initiatives, such as research and development or potential shareholder returns, without relying on external financing.
• Strong Profit Growth: Quality companies should not only be profitable but also growing their profits at a healthy rate. The screen filters for a five-year compound annual growth rate (CAGR) in EBIT (earnings before interest and taxes) greater than 5%. Cirrus Logic reports a solid EBIT growth CAGR of 16.0%, signaling strong and increasing operational performance. This growth in core earnings is often more telling than EPS growth, as it is less susceptible to financial engineering like share buybacks.
• Impeccable Financial Health: A critical risk-mitigation factor in quality investing is a strong balance sheet. The screen uses a Debt-to-Free Cash Flow ratio of less than 5 years as a benchmark. Cirrus Logic is notable with a ratio of 0.0, reflecting a balance sheet with no debt. This very strong financial position eliminates bankruptcy risk and allows the company to manage economic downturns from a position of strength.

Fundamental Analysis Overview

A review of the detailed fundamental analysis report for Cirrus Logic supports the findings from the screen. The company earns an overall fundamental rating of 7 out of 10, with particularly high scores in profitability (9/10) and financial health (10/10).

Key takeaways from the report include:

• Profitability: The company has industry-leading margins, with a profit margin of 18.15% and an operating margin of 22.60%, performing better than a large percentage of its peers in the Semiconductors & Semiconductor Equipment industry.
• Health: Beyond having zero debt, the company displays very good liquidity, with a current ratio of 6.58 and a quick ratio of 5.10, ensuring it can comfortably meet short-term obligations.
• Valuation: Compared to both the industry and the S&P 500, Cirrus Logic seems reasonably valued, with a Price-to-Earnings ratio of 15.82. This suggests the stock is not trading at an excessive premium despite its quality characteristics.
• Growth Considerations: While past revenue and EPS growth have been strong, analyst projections for future growth are more modest. This is a point for investors to consider, as the quality investing approach often involves a long-term view that may extend beyond near-term analyst forecasts.

Conclusion

For investors using a quality-focused strategy like Caviar Cruise, Cirrus Logic presents a solid case. The company is strong in the most critical areas: generating high returns on capital, producing substantial free cash flow, growing its operational profits, and maintaining a debt-free balance sheet. These factors point to a well-managed business with a sustainable competitive position, making it a candidate worthy of deeper due diligence for a long-term portfolio.

To explore other companies that pass the Caviar Cruise quality screen, you can view the full list of results 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 security. Investing involves risk, including the possible loss of principal. You should conduct your own research and consult with a qualified financial advisor before making any investment decisions.