For investors aiming to assemble a portfolio of lasting, high-achieving businesses, the quality investing method provides a structured system. This approach centers on finding companies with durable competitive strengths, sound financial condition, and a demonstrated history of producing high returns on capital over extended timeframes. Instead of searching for steep discounts, quality investors accept paying a reasonable price for outstanding businesses they can hold for many years. An organized method to find these prospects is using a stock screener that selects for particular, measurable signs of corporate strength.
Deckers Outdoor Corp (NYSE:DECK), the company behind leading brands like UGG and HOKA, recently appeared from a screen constructed on these quality investing ideas. The screen, called the "Caviar Cruise," uses a set of strict financial filters to separate companies showing better past performance, earnings power, and financial soundness.
Satisfying the Main Quality Standards
The Caviar Cruise screen assesses companies using a number of important measures, each intended to evaluate a distinct element of business strength. Deckers Outdoor is notable for its very good performance against these standards.
- Revenue & Profit Increase: The screen demands at least a 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Deckers goes well beyond this, with a 5-year revenue CAGR of 8.7% and a very strong EBIT CAGR of 28.3%. Significantly, EBIT increase has greatly exceeded revenue increase, a clear indicator of growing earnings power and possible pricing ability.
- Outstanding Capital Effectiveness: A fundamental part of quality investing is a high Return on Invested Capital (ROIC), which calculates how well a company produces profits from its capital base. The screen requires an ROIC (leaving out cash and goodwill) over 15%. Deckers provides a remarkable number of about 69.8%, showing it creates significant value from each dollar invested.
- Sound Financial Condition & Cash Generation: The screen assesses balance sheet soundness by comparing total debt to free cash flow, looking for a ratio under 5. Deckers performs very well here with a ratio of 0.0, indicating a net cash position and no debt. Additionally, the company shows high "profit quality," turning 97.2% of its net income into free cash flow on average over five years. This shows its accounting profits are supported by actual, available cash.
A Detailed View of the Fundamentals
A wider fundamental analysis of Deckers supports the image shown by the screen. The company receives a high total score, led by top-level grades in earnings power and financial condition.
Its margins lead the industry, with a profit margin of 19.4% and an operating margin of 23.5%, both of which have displayed steady gains. The company's clean balance sheet, emphasized by good liquidity ratios and no debt, almost removes solvency concern. While increase is anticipated to slow from its recent very fast speed, analysts still forecast good high-single-digit growth in revenue and earnings per share for the next few years.
From a price standpoint, Deckers trades at a Price-to-Earnings (P/E) ratio that is fair compared to both its own past measures and the wider market. Considering its better earnings power and growth profile, many analysts believe the stock is not overly expensive, a main point for quality investors who steer clear of excessive prices even for excellent businesses.
The Quality Investment Argument for Deckers
For a quality investor, Deckers Outdoor offers a strong case that goes past the figures. The company’s success is supported by durable, lasting brand advantages, particularly with the renewed popularity of UGG and the very fast rise of HOKA as a frontrunner in the performance running segment. This brand power converts directly into the pricing ability and high returns on capital that the screen found.
Management has shown disciplined capital use by operating with no debt and giving cash back to shareholders through steady share repurchases. The company’s operational emphasis on high-margin direct-to-consumer sales and its worldwide brand attraction match the non-numerical points quality investors look for: clear business models, competitive strengths, and some resistance to economic downturns through brand allegiance.
Finding Other Quality Prospects
Deckers Outdoor Corp acts as a leading example of the kind of company a quality-oriented screening process can find. Investors wanting to use this method to discover other possible prospects can examine the standards directly using the Caviar Cruise stock screener.
Disclaimer: This article is for information only and does not form financial guidance, a suggestion, or an offer to buy or sell any security. Investing carries risk, including the possible loss of principal. Readers should perform their own investigation and talk with a qualified financial advisor before making any investment choices.
