For investors aiming to assemble a collection of lasting, successful businesses, the quality investing method provides an organized system. This process centers on finding firms with durable competitive positions, reliable earnings, sound finances, and the capacity to produce high returns on capital across many years. One organized method to find these opportunities is through filters like the "Caviar Cruise," which selects for measurable signs of quality, including solid revenue and profit expansion, high returns on invested capital, good free cash flow production, and an acceptable level of debt. A firm that appears from this filter deserves further study from investors who value business strength above temporary price changes.
Franklin Electric Co., Inc. (NASDAQ:FELE) is a worldwide head in creating and building pumping systems for water and fuel. The firm works through three parts: Water Systems, Distribution, and Energy Systems, supplying key parts for groundwater access, water movement, and fuel delivery systems. With a background covering many years and operations in areas across the globe, Franklin Electric has become a vital participant in its specialty, serving requirements that are basic to home, farm, and business activities.
Matching the Quality Investing Standards
When measured against the main filters of a quality-centered screen, Franklin Electric displays a strong profile. The firm's financial numbers match closely with the traits quality investors look for: lasting earnings, effective capital use, and a very strong balance sheet.
Earnings and Expansion A central part of quality investing is a shown record of expansion, not only in revenue but, more critically, in operating income. This shows pricing ability and operating effectiveness.
- EBIT Growth: Franklin Electric's 5-year CAGR for EBIT (Earnings Before Interest and Taxes) is a notable 13.75%. This is higher than the common screen limit of 5% and shows steady, reliable growth of its main operating earnings.
- Earnings Quality: Possibly more revealing is the firm's Earnings Quality, calculated as the 5-year average of Free Cash Flow to Net Income. Franklin Electric's number of 110.27% shows it turns more than 100% of its reported profits into actual, available cash. This outstanding cash conversion is a sign of an established, effective business with high-grade earnings, a key filter in the Caviar Cruise screen.
Capital Effectiveness and Financial Soundness Quality investors value firms that produce high returns on the capital shareholders and lenders have provided. They also require a balance sheet that offers security and options.
- Return on Invested Capital (ROIC): Franklin Electric's ROIC, leaving out cash, goodwill, and intangibles, is a solid 24.90%. This is much better than the 15% standard often used in quality screens and implies the firm holds important competitive strengths, letting it use capital at very profitable levels.
- Debt Handling: The firm's financial sturdiness is supported by its Debt to Free Cash Flow ratio of 1.01. This means Franklin Electric could pay off all its debt with slightly more than one year of present free cash flow. This very good ratio, much lower than the screen's limit of 5, shows little financial danger and great ability to finance growth, pay dividends, or buy back shares without difficulty.
Fundamental Review Summary
An examination of Franklin Electric's detailed fundamental report supports the results from the quality screen. The report gives the firm a total score of 6 out of 10, stating it is "very considerable for quality investing."
The review points out several positive areas:
- Earnings (Score: 7/10): The firm scores well on earnings measures, with an ROIC that is better than over 81% of its machinery industry group. Both operating and gross margins have displayed upward movement in recent years.
- Financial Soundness (Score: 8/10): This is a strong area. The report mentions an "excellent" Altman-Z score, showing very low bankruptcy danger, and confirms the very good Debt-to-FCF ratio is better than almost 89% of the industry.
- Dividend (Score: 6/10): Franklin Electric has a steady history, having paid and increased its dividend for more than ten years, with a yearly growth rate over 11%.
The main point of care is in the Valuation (Score: 3/10) group, where the stock is called "quite expensive" with a P/E ratio of 24.43. However, the report also states that its price is similar to both the industry and the wider S&P 500, and that its high earnings may support a higher price.
Is FELE a Quality Stock?
Franklin Electric Co., Inc. represents many features that quality investors methodically look for. Its good and increasing EBIT, outstanding cash conversion, top-level return on capital, and clean balance sheet meet the important marks for financial durability and operating strength. The firm works in necessary, non-optional markets—water and energy systems—which offers some stability during downturns and fits with the quality investing idea of finding businesses based on lasting trends.
While its present price may cause some value-focused investors to wait, the quality investing view often agrees to pay a reasonable price for a superior business. Franklin Electric seems to be a firm made for the long term, able to grow value through different economic periods.
For investors wanting to use this method, you can locate more firms that pass the Caviar Cruise quality screen here.
Disclaimer: This article is for information only and does not form financial guidance, a suggestion to buy or sell any security, or a support of any investment plan. Investors should perform their own study and talk with a registered financial advisor before making any investment choices.