For investors aiming to assemble a portfolio of lasting, high-achieving businesses, the principles of quality investing offer a valuable framework. This method centers on finding companies with durable competitive strengths, sound financial condition, and the capacity to produce outstanding returns on capital over many years. One organized way to find these companies is the "Caviar Cruise" stock screen, which selects for firms with solid historical growth, high earnings, and careful financial stewardship. A present leader from this strict process is Howmet Aerospace Inc (NYSE:HWM), a maker of engineered parts for the aerospace and transportation sectors.
A Profile in Quality: Howmet's Financial Footprint
Howmet Aerospace works at the center of the global aerospace supply chain, making essential jet engine parts, fastening systems, and airframe structures. Its business is fundamentally connected to long-term movements in air travel, defense budgets, and fuel economy, which require the advanced lightweight metals that Howmet focuses on. The company's basic measurements show a profile that matches the central ideas of quality investing.
Meeting the Caviar Cruise Criteria
The Caviar Cruise screen uses a number of numerical filters to identify quality candidates. Howmet Aerospace not only meets these filters but performs very well in several aspects, giving a clear example of what the screen aims to locate.
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Outstanding Return on Capital: A central idea of quality investing is a high return on invested capital (ROIC), which shows a company's skill at creating earnings from its capital foundation. The screen asks for an ROIC (leaving out cash, goodwill, and intangibles) over 15%. Howmet's number of 42.1% is remarkable, indicating it has notable competitive strengths and works with high efficiency. This high return is a main reason quality investors may accept a higher price for a business, as it shows a capacity to increase value steadily.
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Solid and Rising Earnings: The strategy searches for companies where earnings growth exceeds sales growth, a signal of pricing strength and operational efficiency. Howmet's 5-year EBIT (earnings before interest and taxes) compound annual growth rate (CAGR) of 21.4% is much greater than its good sales CAGR of 10.0%. This gap verifies that the company is not only increasing revenue but is also becoming more profitable as it gets larger, a important signal of a quality business.
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Sound Financial Condition: Quality companies do not carry excessive debt. The screen applies a Debt-to-Free Cash Flow (FCF) ratio under 5 years to make sure debts can be easily managed. Howmet's ratio of 2.1 years is very good, showing it could pay off all its debt with just over two years of present cash flow. This financial strength offers stability and options to manage economic changes.
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High-Grade Earnings: The screen selects for a 5-year average Profit Quality (FCF/Net Income) over 75%, making sure stated earnings become real, available cash. Howmet's average of 96.5% is excellent, demonstrating that almost each dollar of net income changes into free cash flow. This cash production is what finally pays for dividends, share repurchases, and new investment without needing outside money.
Fundamental Analysis Overview
An examination of Howmet's wider fundamental report supports the results from the specific screen. The company receives a high total score of 7 out of 10, with special performance in two key areas:
- Profitability (Score: 9/10): Howmet scores very well here, displaying sector-leading margins and returns. Its operating margin of 25.8% and ROIC of 18.7% are better than most of its aerospace and defense industry counterparts.
- Financial Condition (Score: 8/10): The company is considered financially sound, with a strong Altman-Z score and the acceptable debt level shown by the screen's Debt/FCF filter.
The report states that growth continues to be solid, with previous and expected future sales and EPS growth much better than normal. The main area of attention is valuation, where the stock gets a low score (2/10) because of a high Price-to-Earnings ratio. This is a common balance in quality investing: excellent businesses are seldom inexpensive. Investors must determine if the higher price is warranted by the lasting competitive strengths and financial qualities being shown. You can review the complete, itemized analysis in Howmet's fundamental analysis report.
Conclusion
Howmet Aerospace provides a valuable example for the quality investing method. It shows the effective mix of necessary features: a strategic market role linked to long-term expansion, remarkable returns on capital, increasing profitability, strong cash creation, and a firm balance sheet. While its present price requires thoughtful analysis, the company's operational and financial performance makes it a leading example of the kind of business quality investors aim to hold for the long term.
For investors wanting to find other companies that meet the same strict quality filters, the Caviar Cruise screen is ready to use and modify. You can see the present screen outcomes and change the settings for your own research method via this link.
Disclaimer: This article is for information only and is not financial advice, a suggestion to buy or sell any security, or a support of any investment plan. Investors must do their own complete research and think about their personal financial situation and risk willingness before making any investment choices.
