DIGI INTERNATIONAL INC (NASDAQ:DGII) – A Quality Stock in the IoT Space

DIGI INTERNATIONAL INC (NASDAQ:DGII) stands out as a potential candidate for quality investors, particularly those focused on long-term holdings in growing industries. The company, which specializes in IoT connectivity solutions, meets several key criteria for quality investing, including strong profitability, efficient capital allocation, and solid financial health.

Why DGII Fits the Quality Investing Profile

• High Return on Invested Capital (ROIC): DGII’s ROIC (excluding cash and goodwill) is an impressive 50.82%, well above the 15% threshold typically sought by quality investors. This indicates the company generates substantial returns from its operational investments.
• Strong EBIT Growth: Over the past five years, EBIT growth has averaged 36.90%, demonstrating the company’s ability to expand profitability at a rapid pace.
• Low Debt Relative to Cash Flow: The debt-to-free cash flow ratio is just 0.67, meaning DGII could theoretically pay off all its debt in less than a year using its current cash flow—a sign of financial strength.
• Exceptional Profit Quality: The five-year average profit quality (free cash flow to net income) is 321.51%, far exceeding the 75% benchmark. This suggests DGII converts a significant portion of its earnings into real cash.

Fundamental Strengths

DGII’s fundamentals reinforce its position as a quality stock:

• Profitability: The company scores well on margins, with a 10.07% net profit margin and 13.11% operating margin, outperforming most peers in the communications equipment industry.
• Valuation: Trading at a P/E ratio of 15.84, DGII appears reasonably priced compared to both its industry and the broader market.
• Growth Prospects: While recent revenue growth has slowed, analysts expect modest expansion in both revenue and earnings over the next few years.

Considerations for Investors

Despite its strengths, DGII has some areas to monitor:

• Recent Revenue Decline: Revenue dipped by 4.46% over the past year, though long-term growth remains positive.
• Below-Average ROIC Trend: The three-year average ROIC of 4.84% is below the industry average, though recent improvements suggest a positive shift.

For investors seeking quality stocks in the IoT sector, DGII presents a compelling case. Its high ROIC, strong cash generation, and disciplined financial management align well with the principles of quality investing.

Our Caviar Cruise screener provides more quality stock ideas and is updated regularly. For a deeper dive into DGII’s fundamentals, review the full analysis here.

Disclaimer

This is not investing advice. The observations here are based on current data, but investors should conduct their own research before making decisions.