Fair Isaac Corp (NYSE:FICO) Passes the Caviar Cruise Screen for Quality Investors

For investors looking for companies with lasting competitive strengths and steady financial results, the Caviar Cruise screening method provides a structured way to find sound investments. This approach concentrates on businesses showing good revenue and profit increases, high returns on invested capital, good cash flow production, and acceptable debt amounts. The thinking is based on locating enterprises suitable for long-term ownership, where numerical measures act as the first step for more detailed non-numerical assessment.

FAIR ISAAC CORP (NYSE:FICO), the company responsible for the widely used FICO credit score, appears as a strong candidate from this screen. The company's position as a supplier of analytics and decision management software matches several important non-numerical characteristics wanted by sound investors, including a durable competitive barrier, a business model that is fairly resistant to economic downturns, and an international presence.

Meeting the Core Caviar Cruise Criteria

The Caviar Cruise screen uses a multi-step group of filters to find companies with a confirmed history of soundness. Fair Isaac Corp. satisfies or goes beyond these basic needs in a number of key areas.

• Historical Growth: The screen calls for a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT over five years. FICO greatly exceeds this, with a revenue CAGR of 14.6% and an even better EBIT CAGR of 23.7%. The reality that EBIT increase is faster than revenue increase is an important sign of better operational effectiveness and pricing ability, a central part of the sound investing philosophy.
• High Profitability: A main part of the strategy is a high return on invested capital (ROIC), which gauges how well a company produces profits from its capital base. The screen needs an ROIC (leaving out cash and intangibles) above 15%. FICO’s number of about 596% is remarkable, showing a very asset-light business that generates very large returns on each dollar invested.
• Financial Condition and Cash Flow: Sound companies need to have good balance sheets.
  • The Debt-to-Free Cash Flow ratio, which indicates how many years of present cash flow are required to repay debt, is a good 3.7 years, within the screen's acceptable limit of less than 5 years.
  • Profit Quality, which matches free cash flow to net income, averages a very good 122% over five years for FICO. This shows the company is turning its accounting profits into even more actual cash, a mark of high-grade earnings.

Fundamental Analysis Overview

An examination of the detailed fundamental analysis report for FICO supports the results from the screen. The company receives an overall score of 6 out of 10, with its best performance in profitability, where it gets a 9. Main points from the report are:

• Profitability Strength: FICO's margins are with the best in the software sector, with a profit margin of 32.8% and an operating margin of 45.9%. These margins have displayed steady improvement in recent years.
• Good Growth Path: The company shows good historical increase in both earnings per share (25.85% 5Y CAGR) and revenue, with experts forecasting continued good increase ahead.
• Valuation Points: The report states that while FICO sells at a high price based on standard Price-to-Earnings measures compared to the wider market, its price is more similar to its software industry counterparts. The high increase rate and remarkable profitability are elements that could support this high price for sound investors.
• Points to Watch: The main issue brought up is liquidity, with current and quick ratios under 1.0. Still, this is partly balanced by a good Altman-Z score, showing low bankruptcy danger, and the good Debt-to-FCF ratio noted before.

Alignment with Quality Investing Principles

Beyond the figures, FICO displays traits that are more difficult to measure but necessary for a long-term sound investment. The company gains from an important competitive edge due to the industry-standard status of its FICO score, creating high switching expenses and a lasting barrier. Its services are necessary for the operation of the consumer credit system, making demand fairly consistent. The business is also simple to grasp and has shown a capacity to regularly increase prices, reflecting the worth of its products.

For investors wanting to use this method to discover other possible sound holdings, the Caviar Cruise screen is ready to use. You can view and customize the screen here to see the current list of qualifying companies.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy, sell, or hold any security, or an endorsement of any investment strategy. All investments involve risk, including the possible loss of principal. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions.