For investors looking to assemble a group of durable, high-achieving companies for the long term, the ideas of quality investing offer a useful structure. This method centers on finding businesses with lasting competitive strengths, high profitability, sound financial condition, and steady expansion, companies an investor would be at ease holding for many years. One organized way to find these stocks is the "Caviar Cruise" filter, based on quality investing ideas. This filter selects for companies with solid past revenue and profit expansion, high returns on invested capital, good cash flow conversion, and reasonable debt amounts. A recent run of this filter has identified Ferguson Enterprises Inc (NYSE:FERG) as a possible option deserving of more review by investors focused on quality.
A Profile of Steady Performance
Ferguson Enterprises works as a top distributor of plumbing and heating, ventilation, and air conditioning (HVAC) products in the United States and Canada. Serving professional contractors in repair, maintenance, and new building markets, the company has established a large system of distribution centers, branches, and online sales channels. This size and its attention to the necessary, non-optional parts of the construction industry supply a base of steadiness. The business model is fairly simple to grasp, distributing essential building products, which matches a main quality investing idea of investing in understandable companies.
Matching the Main Quality Investing Standards
The Caviar Cruise filter uses several measurable conditions to search for quality. Ferguson's financial numbers show a good match with these main needs:
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Maintained Expansion: The filter requires a 5-year compound annual growth rate (CAGR) above 5% for both revenue and EBIT (earnings before interest and taxes). Ferguson exceeds this easily, with a revenue CAGR of 8.5% and an even higher EBIT CAGR of 14.4% over the last five years. Importantly, EBIT expansion has been faster than revenue expansion, a sign of better operational efficiency and possible pricing strength, a mark of a quality business with competitive edges.
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Outstanding Capital Use: Maybe the most important number for quality investors is a high Return on Invested Capital (ROIC), which calculates how well a company produces profits from its capital base. The filter needs an ROIC (leaving out cash, goodwill, and intangibles) over 15%. Ferguson does very well here, with a number of 23.7%, showing it creates significant value from each dollar invested. This high return points to a strong competitive position and good management performance.
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Financial Strength and Cash Flow Character: Quality companies are not weighed down by debt and produce high-character earnings. The filter selects for a Debt-to-Free Cash Flow number below 5, meaning it would take under five years of present cash flow to clear all debt. Ferguson's number of 2.5 shows a very sound and workable debt situation. Also, its average "Profit Quality" over five years, measuring how much net income becomes free cash flow, is 82.3%, above the 75% filter limit. This shows that Ferguson's accounting profits are supported by actual cash coming into the business, a signal of financial soundness and maturity.
Basic Condition and Valuation Setting
A wider look at Ferguson's basic profile backs the view from the quality filter. The company's total basic rating is a firm 6 out of 10. Its biggest strength is in profitability, where it gets an 8, having sector-leading returns on equity and assets. Its financial condition score of 6 is helped by a sound Altman-Z score (showing low bankruptcy risk) and the positive debt-to-cash flow number mentioned before, though its liquidity measures are more middling.
On expansion, Ferguson gets a 6, with a good past record and analysts expecting continued revenue and earnings growth above 8% each year. The valuation score of 4 shows a market that acknowledges its quality; while its P/E ratio seems high alone, it is generally similar to both the market and its sector group. For quality investors, paying a reasonable price for a superior business is often better than buying a middling business at a low price. You can review the complete, itemized look in Ferguson's basic analysis report.
Is Ferguson a "Buy-and-Hold" Quality Stock?
For an investor using a quality-centered, buy-and-hold plan, Ferguson makes a strong argument. It works in a split but necessary industry, where its size, logistics network, and product range supply competitive edges. Financially, it displays the main features the Caviar Cruise filter looks for: steady expansion driven by profitability, high returns on capital, a firm balance sheet, and dependable cash flow production. These traits indicate a business made to endure economic shifts and increase value over time.
While the filter supplies a useful beginning, it is a numerical tool. The last step for any quality investor requires subjective assessment of the company's lasting competitive position, the skill of its management, and the durability of its industry trends.
Want to review other companies that meet the Caviar Cruise quality filter? You can see and adjust the filter yourself here.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. Investing has risk, including the possible loss of principal. You should do your own research and talk with a qualified financial advisor before making any investment choices.
