For investors aiming to build a portfolio of lasting, well-run businesses, the quality investing approach provides a structured framework. This method centers on finding companies with durable competitive strengths, reliable profitability, and sound financial condition, with the goal of owning them for an extended period. One useful tool for this process is the "Caviar Cruise" stock screen, which uses measurable filters to identify firms showing past revenue and profit increases, high returns on capital, and good cash generation. A company that now passes this screen is MAXIMUS INC (NYSE:MMS), a government services contractor, deserving further examination from investors focused on quality.
Core Profitability and Return on Capital
A central part of quality investing is assessing how well a company uses its capital to produce profits. The Caviar Cruise screen demands a high Return on Invested Capital (ROIC), specifically looking for a number over 15% when calculated on core operating assets (leaving out cash and intangibles). This measure is important because it reveals if a business is producing real economic value.
- MAXIMUS reports an ROIC (leaving out cash, goodwill, and intangibles) of 71.03%, which is much higher than the screen's 15% requirement.
- This very high number shows that the company's main government services activities use capital very effectively, producing significant profits from a fairly small asset base.
Past Growth and Financial Discipline
Quality companies do not only earn high returns, they show a history of growth and financial care. The screen searches for steady increases in both revenue and, more critically, Earnings Before Interest and Taxes (EBIT), which shows core operational performance. It also applies firm checks on debt levels compared to cash flow.
- EBIT Growth: Over the last five years, MAXIMUS has reached an EBIT Compound Annual Growth Rate (CAGR) of 14.64%, easily above the screen's 5% minimum. This points to growing profitability in its core operations.
- Debt Management: The company's Debt-to-Free Cash Flow ratio is 3.64, which is under the screen's maximum of 5. This means MAXUS could pay off all its debt with less than four years of current free cash flow, showing a manageable and careful debt level.
- Cash Flow Quality: Maybe most notably, the company's five-year average Profit Quality, which calculates how much net income becomes free cash flow, is 131.5%. This is above the 75% filter and shows that MAXIMUS is producing more cash than its accounting profits indicate, a signal of financial soundness and high-grade earnings.
Fundamental Analysis Overview
A wider look at MAXIMUS's fundamentals, as explained in its detailed analysis report, backs the screen's results. The company receives a good overall fundamental rating, with specific strong points in profitability and valuation.
- Profitability: The company performs well on important measures like Return on Equity (19.06%) and Operating Margin (9.73%), which have gotten better in recent years.
- Valuation: The stock seems fairly valued, trading at a Price-to-Earnings ratio of 13.05, which is lower than most of its industry competitors and the wider S&P 500.
- Considerations: The analysis mentions some smaller worries about financial condition, like a rising debt-to-assets ratio, and notes that future revenue and earnings growth are predicted to slow from their past rates.
Suitability for Quality Investors
MAXIMUS makes a strong case for quality investors based on the Caviar Cruise standards. Its very high return on invested capital and excellent cash conversion show the operational skill and pricing strength that quality strategies look for. The good past EBIT growth and careful debt profile further describe a disciplined, well-run company. While the future growth path may be more measured, the company's established role in government services, a stable, repeating revenue source, fits with the quality investing idea of searching for businesses resistant to economic shifts. The appealing current price compared to its profitability may provide a good opportunity for investors ready to pay a fair price for a quality business.
For investors wanting to find other companies that meet these strict quality tests, the Caviar Cruise screen is ready to use and adjust here.
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Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation to buy or sell any security, or an endorsement of any investment strategy. Investors should conduct their own research and consult with a qualified financial advisor before making any investment decisions.
