For investors aiming to assemble a portfolio of lasting, well-managed businesses, the quality investing method provides a structured system. This system centers on finding firms with durable competitive strengths, high profitability, reliable expansion, and sound financial condition, with the plan of owning them for many years. One useful instrument for this process is the "Caviar Cruise" stock filter, which measures important quality indicators. The filter prioritizes past revenue and profit expansion, high returns on invested capital, solid free cash flow production, and a reasonable amount of debt. A firm that emerges from this strict process justifies more detailed study by investors focused on quality.
Franklin Electric Co Inc (NASDAQ:FELE) is a worldwide leader in designing and making pumping systems for water and fuel. The firm works through three parts: Water Systems, Distribution, and Energy Systems, supplying critical parts for groundwater access, water transfer, and fuel dispensing. Lately, this established industrial company has been identified by quality filters, indicating its fundamental business traits match the strict standards long-term investors frequently look for.
Matching the Central Quality Standards
The Caviar Cruise filter uses several basic checks to separate firms with a record of operational superiority and financial soundness. Franklin Electric's profile indicates a strong match across these central areas:
- Profitability and Capital Efficiency: A central part of quality investing is a firm's capacity to produce high returns on the capital it uses. The filter demands a Return on Invested Capital (leaving out cash and goodwill) above 15%. Franklin Electric not only matches but greatly surpasses this level with a ROICexgc near 24.9%. This shows management is very good at using capital to create profits, a signal of a lasting competitive edge and efficient activities.
- Solid Cash Flow and Reasonable Debt: Quality firms finance their activities and expansion through strong internal cash creation, not too much debt. The filter searches for a Debt-to-Free Cash Flow ratio below 5, meaning it would require under five years of present cash flow to eliminate all debt. Franklin Electric performs very well here, with a ratio of only 1.01, showing a particularly strong balance sheet. Also, its five-year average Profit Quality, which calculates how much net income becomes real free cash flow, is a notable 110.3%, far above the 75% filter limit. This shows earnings are of high caliber and easily accessible for reinvestment, dividends, or lowering debt.
- Past Expansion Path: While prior results do not assure future outcomes, a history of expansion is a sign of a business that is increasing its scope and importance. The filter looks for firms with a five-year compound annual growth rate (CAGR) for EBIT (earnings before interest and taxes) above 5%. Franklin Electric's EBIT expansion over this time is a solid 13.7%, proving its capacity to reliably grow its core operating profits at a good rate.
A View of Financial Condition and Price
A wider look at Franklin Electric's fundamental report, shown in full here, supports the quality argument. The firm receives an overall fundamental score of 6 out of 10, with specific high points in Profitability (score: 7/10) and Financial Health (score: 8/10).
- Profitability & Margins: The firm has an ROIC that beats over 80% of its machinery industry competitors. Both its operating and profit margins have displayed positive upward movements in recent years, hinting at better efficiency and possible pricing strength.
- Financial Strength: The outstanding Debt-to-FCF ratio is supported by a low Debt-to-Equity ratio of 0.10 and a high Altman-Z score, all pointing to very little bankruptcy risk and a careful financial framework. The firm also has a dependable record of increasing its dividend.
- Expansion & Price Points: Analysts expect consistent, mid-single-digit revenue growth and double-digit EPS growth in the future. The main point for investors is price. The stock's present Price-to-Earnings ratio is seen as quite high, and its PEG ratio indicates the market price already includes much of its growth outlook. For a quality investor, this highlights the need for discipline, waiting for a more favorable price to purchase a strong business, instead of paying any cost.
Is FELE a Quality Investment Prospect?
Franklin Electric makes a strong argument for investors using a quality system. It functions in necessary markets (water and energy infrastructure), shows the financial markers of a well-run company, high capital returns, a very strong balance sheet, and high-caliber cash flows, and has a proven history of profit expansion. These are the exact measurable features the Caviar Cruise filter is made to find: firms constructed to last and increase value over many years.
The filter that identified Franklin Electric is built on a specific group of quality checks. Investors wanting to examine other firms that pass this same group of standards can use the Caviar Cruise filter themselves.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer to buy or sell any security. Investors should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions.
