For investors aiming to construct a portfolio of lasting, high-achieving businesses, the quality investing philosophy offers a useful framework. This method centers on finding companies with durable competitive strengths, sound financial condition, and the capacity to produce high returns on capital over many years. Instead of searching for very cheap stocks, quality investors frequently accept a reasonable price for outstanding businesses they can hold for a long time. One organized method to find these companies is through filters built on measurable financial standards, such as the "Caviar Cruise" method, which stresses reliable growth, high profit margins, and financial soundness.
A recent use of this filter has identified Graco Inc. (NYSE:GGG) as a possible candidate. Graco is a maker of systems and equipment used to move, measure, control, and spray fluid and powder materials, serving industrial, commercial, and contractor markets worldwide. We will look at how its financial profile matches the main supports of quality investing.
Matching the Main Financial Standards
The Caviar Cruise filter uses several rules to find companies with a record of high performance and a base for continued results. Graco's financial numbers show a solid match:
- Continued Growth: The filter needs a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Graco passes these levels, with a revenue CAGR of 9.55% and an EBIT CAGR of 6.08%. This shows the company has steadily grown its business and profits.
- Rising Profitability: A key rule requires that EBIT growth is faster than revenue growth, pointing to better operational efficiency or pricing ability. Graco meets this check, with its EBIT growth (6.08%) occurring alongside its solid revenue growth. This implies the company is not only increasing sales but is doing so with growing profit.
- Outstanding Capital Effectiveness: Maybe the most significant number for quality investors is Return on Invested Capital (ROIC), which calculates how well a company produces profits from its capital base. The filter seeks a figure over 15%. Graco performs well here, reporting an ROIC (leaving out cash, goodwill, and intangibles) of 37.14%. This high return points to a durable competitive edge and excellent management performance.
- Careful Financial Management: To confirm financial durability, the filter examines debt compared to free cash flow (FCF). A ratio under 5 is viewed as solid. Graco's ratio is a very low 0.06, meaning it could pay off all its debt with less than one month's worth of free cash flow. This points to a very strong balance sheet with little financial danger.
- High-Grade Earnings: The filter also checks "profit quality" by comparing free cash flow to net income, seeking an average above 75% over five years. Graco's number is 81.48%, verifying that its accounting profits are regularly turned into real, usable cash, a mark of lasting earnings capacity.
A Broad Fundamental Look
An examination of Graco's wider fundamental analysis report supports the image shown by the filter. The company receives an overall fundamental score of 7 out of 10, with special performance in two areas important for quality investors.
- Profitability (Score: 9/10): Graco's margins are excellent. Its operating margin of 27.61% and profit margin of 22.72% place in the highest group of its machinery industry group. The high ROIC mentioned earlier further supports its position as a very profitable company.
- Financial Condition (Score: 9/10): The company's balance sheet is very strong. Beyond the small debt, it has high liquidity with current and quick ratios well above industry norms. Its Altman-Z score shows almost no bankruptcy risk.
The primary area for investor thought is Valuation (Score: 3/10), which is currently viewed as high. The stock sells at a high price based on standard price-to-earnings measures. However, quality investors often state that superior, lasting businesses justify high prices, and the focus is on long-term holding rather than short-term purchase timing.
You can review the complete details of this analysis in Graco's detailed fundamental report.
Match with Non-Quantitative Quality Ideas
Beyond the figures, Graco also shows several less measurable features that quality investors value. The company works in necessary, specialized markets (fluid handling and coating) where its knowledge and specific equipment build a competitive edge. Its worldwide presence gives diversification and entry to growing markets. The business model, while technically detailed, is basically understandable: it produces highly engineered pumps, sprayers, and systems that customers need for important uses. This often leads to pricing ability and repeat revenue from parts and service.
Locating Additional Quality Candidates
Graco Inc. acts as a leading example of how organized filtering can find companies that represent the ideas of quality investing, showing steady growth, excellent profitability, and very strong financials. For investors wanting to find other companies that pass similar strict financial checks, the Caviar Cruise filter offers a solid beginning point for more study.
You can see and adjust the filter used to find Graco and locate other possible quality investments here.
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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The information presented is based on data provided and should not be the sole basis for any investment decision. Investors should conduct their own thorough research and consult with a qualified financial advisor before making any investment decisions.
