DIGI INTERNATIONAL INC (NASDAQ:DGII) Meets Caviar Cruise Strategy Standards for High-Quality Investment

The Caviar Cruise stock screening strategy aims to find high-quality companies for long-term investment. Based on Belgian author Luc Kroeze’s "The Caviar Formula," this method looks for firms with solid revenue and profit growth, high returns on invested capital (ROIC), reasonable debt levels, and steady cash flow. The strategy uses measurable data to select businesses with lasting competitive edges, efficient operations, and strong finances.

DIGI INTERNATIONAL INC (NASDAQ:DGII) fits many of this strategy’s important standards.

Key Metrics Matching Caviar Cruise Standards

1. Strong EBIT Growth (5Y CAGR: 36.9%)
The Caviar Cruise screen looks for at least 5% yearly EBIT growth over five years, showing core profitability. DGII surpasses this mark, highlighting its ability to grow earnings effectively. This growth points to scale benefits, pricing strength, or operational gains, signs of a well-run business.

2. High ROIC (Excluding Cash & Goodwill: 50.8%)
ROIC is vital for quality investors, measuring how well a company uses reinvested capital. DGII’s ROIC of 50.8% (excluding cash and goodwill) is outstanding, far above the screen’s 15% minimum. This shows smart capital use and a strong competitive edge.

3. Low Debt-to-Free Cash Flow (0.67)
The strategy prefers companies with manageable debt, checked through the Debt/FCF ratio. DGII’s ratio of 0.67 means it could clear all debt in less than a year using current free cash flow, well below the screen’s 5-point cap. This financial flexibility lowers risk and supports stability.

4. Strong Profit Quality (5Y Avg: 321.5%)
Profit Quality, comparing free cash flow to net income, shows earnings reliability. DGII’s 321.5% five-year average is notably high, suggesting careful accounting and excellent cash conversion. While reinvestment can lower this figure, DGII’s high ROIC supports its spending.

Additional Strengths Beyond the Screen

A closer review of DGII’s fundamental analysis reveals more positives:

• Profitability: Margins lead the industry, with a 13.1% operating margin (top 15% of peers) and 61.1% gross margin.
• Valuation: Trading at a P/E of 16.5, DGII is more affordable than 73% of industry peers and the S&P 500 (P/E 28.0).
• Solvency: A solid Altman-Z score (5.57) and low debt/equity ratio (0.12) highlight financial strength.

Points to Consider

• Revenue Growth: Recent revenue fell 4.5% YoY, though five-year CAGR data is missing. Analysts expect modest future growth (2.7% yearly), which may worry growth-focused investors.
• ROIC vs. WACC: Despite high ROIC, it currently lags DGII’s cost of capital, needing further review.

Final Thoughts

DGII displays many qualities quality investors seek: high profitability, efficient capital use, and financial durability. While risks like slower growth exist, its operational strengths and valuation make it worth deeper study.

For more stocks meeting the Caviar Cruise standards, see the full screen here.

Disclaimer: This article is not investment advice. Do your own research or consult a financial advisor before investing.