For investors aiming to construct a durable, long-term portfolio, the ideas of quality investing present a useful structure. This method centers on finding companies with lasting competitive strengths, reliable earnings, and sound finances, businesses an investor would be at ease holding for many years. One organized way to locate these companies is the "Caviar Cruise" stock screen, which uses measurable filters to identify firms with a record of solid revenue and profit increase, high returns on invested capital, and very good cash flow conversion. The aim is not to locate temporary discounts, but to identify well-managed enterprises available at fair prices.
A recent use of this screen has brought attention to MAXIMUS INC (NYSE:MMS), a provider of government health, human services, and technology solutions. A review of its financial details points to several traits that might interest an investor focused on quality.
Matching the Central Standards for Quality
The Caviar Cruise method focuses on several important financial measures as signs of a quality business. MAXIMUS seems to match or go beyond many of these strict standards.
- Outstanding Return on Invested Capital (ROIC): A central part of quality investing is efficient use of capital. The screen asks for an ROIC (leaving out cash, goodwill, and intangibles) over 15%. MAXIMUS greatly exceeds this with a number of 71.03%. This shows the company produces significant profit compared to the capital put into its main operations, a signal of a strong business model and capable management.
- Firm and Increasing Profitability: The screen searches for a history where profit increase exceeds sales increase, indicating better operational effectiveness. MAXIMUS displays a 5-year EBIT (Earnings Before Interest and Taxes) compound annual growth rate (CAGR) of 14.64%. While the given 5-year revenue CAGR information is absent, the firm EBIT increase suggests the company has managed to widen its profit margins over time.
- Sound Financial Condition and Cash Flow: Quality companies should not carry too much debt. The screen employs a Debt-to-Free Cash Flow (FCF) ratio below 5, showing how many years of present cash flow would be required to settle all debt. MAXIMUS has a good ratio of 3.64, comfortably inside the acceptable limit. Also, its average Profit Quality over five years is a notable 131.51%, meaning it turns more than 100% of its net income into free cash flow. This notable cash creation allows options for dividends, share repurchases, or strategic new investment without needing outside funds.
A Broad Fundamental View
A wider view of the company's fundamental analysis report on Chartmill gives more background. The report gives MMS a total score of 6 out of 10, stating its strong points are in profitability and valuation, with a good dividend history.
- Profitability is a Main Strength: The report points out firm returns, with a Return on Equity of 19.06% and a Return on Invested Capital of 11.77%, both doing better than most of its competitors in the IT Services industry. Operating margins have also displayed positive increase in recent years.
- Appealing Valuation: Possibly most important for an investor thinking about a new purchase, the stock seems fairly valued. The report says MMS is valued lower than most industry competitors based on its Price/Earnings (9.47) and Price/Forward Earnings (8.25) ratios. This indicates the market may not completely account for the company's quality traits.
- A Steady Income Source: For quality investors who value shareholder returns, MMS provides a dividend yield of 1.79%, which is higher than the industry average. The company has a steady history of paying and not reducing its dividend for more than ten years, backed by a maintainable payout ratio.
You can examine the full, detailed fundamental analysis for MAXIMUS here: MMS Fundamental Analysis Report.
Points for the Quality Investor
While the numerical filters show a favorable image, the non-numerical parts of quality investing are also very important. MAXIMUS works in a specialized area, administering government programs, that can offer some stability and repeat income, as these are necessary services. However, investors need to think about the built-in risks: the business relies heavily on government contracts, which can be affected by political changes, budget adjustments, and competitive renewal processes. The company’s skill in managing this environment and keeping its high returns on capital will be key to its long-term quality argument.
Locating Additional Quality Prospects
MAXIMUS INC acts as an illustration of the kind of company the Caviar Cruise screen is made to find. For investors wanting to investigate other possible quality investment prospects that pass similar strict financial filters, you can execute the screen yourself. View the current Caviar Cruise screen results and methodology here.
Disclaimer: This article is for information only and does not make up financial guidance, an approval, or a suggestion to buy, sell, or hold any security. Investing carries risk, including the possible loss of the original amount invested. Always do your own complete research and think about your personal financial position and risk comfort before making any investment choices.
