HEICO Corp. Class A (NYSE:HEI.A) Passes the "Caviar Cruise" Quality Investing Filter

For investors aiming to assemble a portfolio of lasting, high-achieving businesses, the quality investing method provides a structured system. This method centers on finding companies with durable competitive strengths, reliable earnings, and sound financial condition, with the plan of owning them for an extended period. A useful instrument for this hunt is the "Caviar Cruise" stock filter, which measures essential quality indicators like persistent revenue and earnings expansion, superior returns on invested capital, solid free cash flow production, and a reasonable level of debt. The filter aids in separating companies that are not only expanding, but doing so productively and with endurance.

Satisfying the Central Quality Standards

A recent run of the Caviar Cruise filter highlighted HEICO Corp. Class A (NYSE:HEI.A), an aerospace and defense parts maker. An examination of its finances reveals a strong match with the filter's core ideas.

• Earnings Growth: The filter requires at least a 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) across five years. HEICO greatly surpasses this, with a 5-year revenue CAGR of 10.5% and an EBIT CAGR of 22.0%. Notably, EBIT expansion has been faster than revenue expansion, a key test that points to better operational effectiveness and possible pricing strength, signs of a quality company with competitive edges.

• Outstanding Capital Effectiveness: For quality investors, a high return on invested capital (ROIC) is crucial, as it demonstrates how well a company produces earnings from its capital. The filter employs a strict version (ROIC excluding cash, goodwill, and intangibles) and sets a demanding minimum at 15%. HEICO's figure here is a notable 36.5%, reflecting excellent capital use and a durable competitive position in its specialized markets.

• Financial Stability & Cash Flow Strength: The method stresses financial soundness by needing debt to be below five times yearly free cash flow (FCF), confirming debts are not excessive. HEICO's ratio of 2.5 is well inside this boundary. Also, the filter checks for "quality" earnings by demanding that, on average, no less than 75% of net income becomes free cash flow over five years. HEICO's average earnings quality of 120.2% not only satisfies but greatly passes this test, showing its reported earnings are supported by strong, actual cash production.

Fundamental Condition and Valuation Perspective

A wider view of HEICO's fundamental picture, as outlined in its detailed analysis report, supports the quality argument but introduces key perspective. The company receives a solid total fundamental score of 7 out of 10, with especially good marks for Profitability (8/10) and Growth (8/10). Its margins and returns on equity and assets are near the best in the aerospace & defense sector. Financial health is considered acceptable, backed by the sound debt-to-FCF ratio mentioned before.

The main point for attention comes from the Valuation (3/10) group. HEICO sells at a high price, with a Price-to-Earnings (P/E) ratio much higher than the wider market norm. This is a typical feature of high-quality, steadily growing firms and highlights a central idea of quality investing: while investors look for excellent businesses, they should still be aware of the cost to own them.

A Subject for More Study

HEICO Corp. offers a strong example of a company that meets a strict, numerical quality filter. Its history of earnings growth, remarkable returns on capital, and good cash flow transformation match closely with the traits quality investors seek for long-term ownership. The Caviar Cruise filter has successfully found a business with these core attributes.

For investors wanting to examine other companies that possess these quality traits, the complete Caviar Cruise filtering outcomes can be found here: https://www.chartmill.com/stock/stock-screener?sid=673&f=sl_rev5y_5_X,sl_roicNg_15_X,sl_debt2fcf_X_5,sl_profitQ5y_75_X,sl_ebit5yGrowth_5_X,exch_us&v=22&s=ta&sd=DESC&cpl=2&bc=false&nw=1&o1=3&op1=200,16711680&o2=3&op2=50,255&o3=1&cf=(ebit5yGrowth%3Erev5y).

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