For investors aiming to assemble a portfolio of durable, long-term holdings, the quality investing method provides a structured system. This strategy centers on finding companies with lasting competitive strengths, sound financial condition, and a consistent history of creating high returns on capital. Instead of searching for large discounts, quality investors accept paying a reasonable price for superior businesses they can hold for many years. An organized method to find these prospects is through filters like the "Caviar Cruise," which selects for strict measures including solid revenue and profit increase, high returns on invested capital, dependable free cash flow production, and a reasonable amount of debt.
Fastenal Co (NASDAQ:FAST), a top distributor of industrial and construction supplies, appears as a strong prospect from such a filter. The company's financial statement matches the central principles of quality investing, displaying the sort of operational skill and financial control that characterizes a long-term wealth builder.
Matching the Main Quality Standards
The Caviar Cruise filter uses several measurable criteria to sort for quality. Fastenal's basic financial data shows a solid match across these important measures:
-
Profitable Increase: The filter demands a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Fastenal surpasses this with a revenue CAGR of 8.94% and an EBIT CAGR of 7.41%. This steady increase points to a business that is growing reliably. Importantly, a quality filter also checks for EBIT increase to be greater than revenue increase, a sign of better profitability and possible pricing strength. While Fastenal's EBIT increase is a little lower than its revenue increase over this time, its high and steady margins point to efficient operation.
-
Outstanding Capital Use: Maybe the most important measure for quality investors is a high Return on Invested Capital (ROIC), which calculates how well a company creates profits from its capital foundation. The filter selects for an ROIC (excluding cash, goodwill, and intangibles) above 15%. Fastenal's ROICexgc of 30.78% is excellent, putting it in the highest group of its industry. This shows that management has a confirmed history of using capital at very profitable rates, a key sign of a quality company.
-
Sound Financial Condition & Cash Flow: Quality companies do not carry too much debt. The filter uses a Debt-to-Free Cash Flow (FCF) ratio below 5, indicating how many years of present cash flow would be required to pay off all debt. Fastenal's ratio of 0.20 is ideal, meaning it could pay off its debt in less than a year. This indicates great financial security and options. Also, the filter looks for a high "Profit Quality," stated as the 5-year average ratio of Free Cash Flow to Net Income. A number above 75% means earnings are becoming real, usable cash. Fastenal's average of 87.39% verifies that its reported profits are dependable and fund dividends, share repurchases, or new investment without difficulty.
Basic Analysis Summary
A detailed basic analysis of Fastenal supports the results from the quality filter. The company receives a solid total basic rating of 7 out of 10, with special strength in profitability and financial condition.
- Profitability is a main advantage, with ratings noting better returns on assets, equity, and invested capital than most industry competitors. Its operating margin above 20% and profit margin close to 15% are maintained over time, showing pricing strength and operational management.
- Financial condition is sound, with an Altman-Z score showing no bankruptcy danger, very little debt, and strong liquidity ratios (Current Ratio of 4.26). This matches the quality investing focus on lasting businesses that can survive economic downturns.
- Increase is consistent, with past revenue and EPS increase in the mid-to-high single digits. Analysts predict a rise, with future yearly EPS increase expected above 11%. This mix of stability and positive trend is appealing.
- Price is the main factor for a possible investor. The analysis states Fastenal's present Price-to-Earnings ratio is high compared to both its industry and the wider market. For a quality investor, this highlights the idea that while quality commands a price, the cost of entry remains important. The high price must be considered next to the company's shown consistency, high returns, and reliable cash flow production.
Fit for a Quality Portfolio
Fastenal's business plan, providing necessary fasteners, tools, and supplies through a large network with extra services like inventory management, shows traits quality investors like. It serves a wide industrial customer base, building durability. Its attention to operational effectiveness and customer service helps maintain competitive edges. The financial outcomes, high ROIC, solid cash flow, and a clean balance sheet, are the direct results of this well-run plan.
For investors using the Caviar Cruise method, Fastenal offers an example of matching measurable quality filters. It shows the effective mix of steady increase, excellent capital use, and very strong financials that identify companies made to endure.
You can review other companies that meet the Caviar Cruise quality filter by viewing the full filter results here.
,
Disclaimer: This article is for information only and is not financial guidance, a suggestion, or an offer to buy or sell any security. Investing holds risk, including the possible loss of original capital. Readers should perform their own study and talk with a registered financial consultant before making any investment choices.
