For investors looking to assemble a group of lasting, successful businesses, the ideas of quality investing offer a useful structure. This method centers on finding firms with durable competitive strengths, sound financial condition, and a consistent history of creating high returns on capital over many years. One organized way to locate these firms is the "Caviar Cruise" stock screen, based on the work of Belgian author Luc Kroeze. This screen uses a set of numerical filters to identify businesses with better past performance, solid profitability, and good cash flow creation. The aim is not to locate temporary discounts, but to discover well-managed companies deserving of a lasting ownership position.
A recent use of this screen has identified Expeditors International of Washington Inc (NYSE:EXPD) as a possible choice for quality investors. As a worldwide logistics company, Expeditors manages the transport of goods by air and sea, providing customs brokerage, warehousing, and specific supply chain services. We can look at how this firm matches the main ideas of the Caviar Cruise method.
Matching the Main Quality Filters
The Caviar Cruise screen employs a detailed group of standards to evaluate a firm's quality. Expeditors International shows strength in many of these basic filters:
- Outstanding Return on Invested Capital (ROIC): A central idea of quality investing, ROIC calculates how well a firm creates earnings from its capital. The screen asks for a ROIC (leaving out cash, goodwill, and intangibles) over 15%. Expeditors greatly passes this with a number of 53.28%, showing a remarkable skill to use capital for profit. This points to a strong business model and important competitive strengths in the logistics industry.
- Careful Financial Management (Debt/FCF): Financial durability is essential for a quality firm. The screen searches for a Debt-to-Free Cash Flow ratio under 5, indicating that any debt is simple to handle. Expeditors is notable with a ratio of 0.0, showing a balance sheet without debt. This offers great operational freedom and lowers risk in economic declines.
- Superior Earnings (Profit Quality): This measure contrasts free cash flow with net income, showing how much reported profit becomes actual, usable cash. The screen looks for a 5-year average over 75%. Expeditors has a number of 103.12%, meaning it creates more free cash flow than its reported net income. This is a sign of financial soundness and suggests earnings do not depend on accounting changes.
- Continued Profit Increase (EBIT Growth): While sales increase is significant, the increase in Earnings Before Interest and Taxes (EBIT) is a clearer gauge of operational growth. The screen requires a 5-year EBIT CAGR over 5%. Expeditors meets this with a rate of 6.31%. Also, the screen requires that EBIT increase is faster than sales increase, showing rising profitability. Expeditors' EBIT increase of 6.31% is faster than its 5-year sales CAGR of 3.37%, showing a skill to gain more profit from its sales—a signal of pricing strength or operational effectiveness.
A Broad Fundamental Perspective
A wider view of Expeditors' fundamental picture supports its quality traits. According to a detailed fundamental analysis report, the firm gets a total rating of 7 out of 10, with special strength in two parts:
- Profitability & Financial Condition: Expeditors gets high ratings for profitability (8/10) and financial condition (9/10). It has top industry margins and returns (like a 37.08% Return on Equity) while keeping a clean, debt-free balance sheet. The firm has been regularly profitable with positive cash flow for many years.
- Valuation & Growth Factors: The valuation score is average (5/10). While its Price-to-Earnings ratio is similar to the wider S&P 500, it seems more fair compared to industry rivals based on cash flow measures. The growth score (4/10) shows a fact for many established quality firms: while past growth has been steady, analyst forecasts for future sales and earnings growth are moderate. This is common, as the higher value for quality firms often comes from their stability and high returns, not fast growth.
Why These Standards Are Important for Quality Investors
The Caviar Cruise filters are not random; they are made to find businesses that fit a lasting, buy-and-hold strategy. A very high ROIC, like Expeditors', suggests a lasting advantage—here, possibly a global network, established customer connections, and advanced technology that rivals cannot quickly copy. A debt-free balance sheet offers a safety buffer, letting the firm invest when chances arise and endure economic changes without difficulty. High profit quality makes sure that shareholder returns through dividends or buybacks are supported by actual cash, not only accounting numbers. Combined, these features describe a durable, well-run company.
Finding More Quality Choices
Expeditors International of Washington offers a useful example of a firm that meets a strict quality investing screen. For investors wanting to use this method to find other possible choices, the Caviar Cruise screen is a helpful beginning. You can view and adjust the screen here to see the present list of qualifying firms and change the standards based on your own study.
Disclaimer: This article is for information only and is not financial advice, a suggestion to buy or sell any security, or a support of any investment plan. Investors should do their own complete study and think about their personal financial situation and risk tolerance before making any investment choices.
