Magic Software Enterprises (NASDAQ:MGIC) Fits the Caviar Cruise Quality Investing Strategy

The Caviar Cruise stock screening strategy aims to find high-quality companies ideal for long-term investment. Based on quality investing principles, this method looks for firms with steady revenue and profit growth, strong returns on invested capital, low debt, and reliable cash flow. The strategy uses measurable factors that show operational strength, financial stability, and lasting competitive edges—qualities that quality investors value when choosing businesses to hold for the long term.

Magic Software Enterprises (NASDAQ:MGIC) fits well with these standards. The company, focused on software development and IT outsourcing, displays traits that attract investors looking for stable, high-performing businesses.

Key Strengths Matching Caviar Cruise Standards

1. High Return on Invested Capital (ROICexgc: 37.0%)
ROIC is a vital measure in quality investing, showing how well a company turns capital into profits. Magic Software’s 37% ROIC is far above the Caviar Cruise minimum of 15%, signaling strong capital use. This implies the firm can reinvest earnings effectively—a sign of lasting competitive strengths.

2. Steady EBIT Growth (5Y CAGR: 12.6%)
EBIT growth higher than revenue growth points to better efficiency and pricing control. Magic Software’s 12.6% yearly EBIT growth over five years shows it can expand profits consistently, a key factor for quality investors focused on sustainable earnings.

3. Low Debt (Debt/FCF: 1.42)
The Caviar Cruise screen prefers companies with modest debt, as too much borrowing can weaken financial stability. Magic Software’s Debt-to-Free Cash Flow ratio of 1.42 means it could pay off all debt in less than 1.5 years with current cash flow—well below the screen’s limit of 5. This cautious financial approach lowers risk for long-term investors.

4. Strong Profit Quality (5Y Avg: 160%)
Profit Quality—calculated as free cash flow compared to net income—shows how much earnings turn into actual cash. Magic Software’s 160% five-year average means it produces more cash than reported profits, a rare and positive trait. This may come from efficient operations or low reinvestment needs, both appealing to quality-focused investors.

Fundamental Analysis Summary

According to ChartMill’s fundamental report, Magic Software scores a solid 6/10, with high marks in profitability and financial health. Key points include:

• Profitability: The company beats most peers in Return on Equity (14.1%) and Operating Margin (11.1%).
• Growth: Revenue has increased at an 11.2% yearly rate over five years, with analysts expecting 7.2% future growth.
• Valuation: While not the cheapest, its P/E (20.8) and Price/FCF ratios are better than 75-85% of industry rivals.

Points to Consider

Despite these positives, Magic Software’s gross margin (28.4%) is lower than many software peers, and its dividend has dropped yearly (-7.8%). Quality investors should weigh whether these issues outweigh its operational strengths.

Finding Other Quality Stocks

For those interested in similar high-quality stocks, the Caviar Cruise screener provides a list of companies meeting these strict criteria.

Disclaimer: This analysis is for informational purposes only and does not constitute investment advice. Investors should conduct their own research or consult a financial advisor before making decisions.