Alphabet Inc. (NASDAQ:GOOGL) Passes the "Caviar Cruise" Quality Investing Screen

For investors aiming to assemble a portfolio of lasting businesses, the quality investing method centers on finding companies with lasting competitive strengths, sound financial condition, and steady profitability. The "Caviar Cruise" stock screening method puts this idea into practice by selecting for firms with a record of strong revenue and profit expansion, high returns on capital, and excellent balance sheets. The aim is not to locate temporary discounts, but to identify businesses able to increase value over many years.

A recent use of this screen has identified ALPHABET INC-CL A (NASDAQ:GOOGL) as a leading example. The technology and advertising group, owner of Google, seems to display many of the numerical characteristics quality investors seek.

Matching the Main "Caviar Cruise" Standards

The standard version of the Caviar Cruise screen uses a number of strict financial filters. Alphabet's core numbers show it not only meets these checks but does so with notable force.

• Growth Steadiness: The screen requires at least a 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Alphabet greatly surpasses this, with a 5-year revenue CAGR of 12.5% and a notable EBIT CAGR of 26.0%. Significantly, EBIT growth has strongly exceeded revenue growth, a main screen filter that points to widening profitability and possible pricing strength.

• Outstanding Capital Use: A central part of quality investing is a high return on invested capital (ROIC), which gauges how well a company produces profits from its money. The screen asks for a ROIC (leaving out cash, goodwill, and intangibles) over 15%. Alphabet's number of 35.6% is outstanding, showing the company uses capital with great effectiveness to build shareholder value.

• Strong Balance Sheet: To judge financial strength, the screen uses the Debt-to-Free Cash Flow (FCF) ratio, favoring companies that could in theory clear all debt in under five years using present cash flow. Alphabet's ratio of 0.29 is very strong, meaning it could erase its complete debt in a short time, indicating very little financial danger.

• Superior Earnings: The "Profit Quality" measure compares free cash flow to net income, looking for a 5-year average over 75%. This makes sure stated profits become real, usable cash. Alphabet's average of 92.3% shows its earnings are of superior grade, with most net income turning into cash that can fund new projects, purchases, or shareholder payments.

Basic Condition and Expansion Picture

A wider view of Alphabet's fundamental analysis report supports the idea. The company receives a high total score of 7 out of 10, with excellent grades in Profitability (9/10) and Financial Condition (9/10).

• Profitability Leader: Margins are solid and increasing. The company's operating margin of 32.8% and profit margin of 32.2% place it near the top of its field. The climbing ROIC and margins in recent years meet the more demanding version of the Caviar Cruise screen, which searches for better profitability patterns.
• Firm Financial Condition: Besides the small debt load, the company has an Altman-Z score of 17.7, pointing to almost no failure risk, and has been steadily lowering its share count.
• Continued Expansion Path: While previous expansion has been notable, analysts estimate continued revenue growth of about 12.5% and EPS growth of over 17% each year in the near future. This expected growth is a part of the advanced screen and implies the company's expansion story is still current.

You can examine the complete, itemized analysis in Alphabet's fundamental analysis report.

Price Thoughts for the Quality Investor

Quality investing accepts that excellent businesses seldom sell for very low prices. Alphabet's present price, with a Price-to-Earnings (P/E) ratio over 32, seems high on a basic view. However, its lower Price-to-Earnings Growth (PEG) ratio implies the price may be more fair when considering its high expansion rate. For the quality investor, the choice often depends on whether the higher price is warranted by the company's lasting competitive strengths, its worldwide size in search and advertising, lead in video through YouTube, and growing cloud infrastructure operation, and its ability to produce large returns on capital for the long term.

Reviewing Other Quality Examples

Alphabet acts as a strong example of a company that fits a strict quality investing system. Investors curious about using this method to find other possible examples can run the screen independently. You can locate the present Caviar Cruise screen and its findings by using this link to the stock screener.

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Disclaimer: This article is for information only and is not financial guidance, a support, or a suggestion to purchase, sell, or keep any security. The "Caviar Cruise" screen is a model built on particular numerical standards and does not promise future results. Investors must perform their own complete investigation and think about their personal money situation and risk appetite before making any investment choices.