For investors aiming to assemble a portfolio of lasting, high-standard businesses, the quality investing method provides a useful framework. This approach centers on finding companies with durable competitive strengths, reliable earnings, sound finances, and a capacity to produce high returns on capital across many years. Instead of searching for large discounts, quality investors frequently accept a reasonable price for outstanding businesses they can own for long periods. One organized method to find these prospects is through filters built on measurable financial data, such as the "Caviar Cruise" method, which selects for solid revenue and earnings expansion, high returns on invested capital, good cash flow conversion, and reasonable debt.
A recent search using this quality-oriented filter has identified Morningstar Inc. (NASDAQ:MORN) as a company deserving further review. The supplier of independent investment research and data seems to match well with multiple central principles of quality investing.
Match with Quality Investing Standards
The Caviar Cruise filter uses a detailed group of criteria intended to separate companies with a record of high performance and a base for continued stability. Morningstar's financial picture demonstrates a good match with these strict requirements.
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Earnings Expansion: The filter demands at least a 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Morningstar exceeds this easily, with a 5-year revenue CAGR of 8.31% and a more notable EBIT CAGR of 17.29%. Importantly, EBIT expansion exceeding revenue expansion, as shown here, is a main filter condition. This signals better operational effectiveness and pricing ability, implying the company is not only increasing sales but is doing so more profitably over time, a sign of a quality firm.
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High Capital Productivity: A core element of quality investing is evaluating how effectively a company creates earnings from the capital put into its operations. The filter requires a Return on Invested Capital (leaving out cash, goodwill, and intangibles) over 15%. Morningstar shows a number of 435.55%, which is very high. This notable figure implies the central operations of Morningstar's asset-light, data-focused business need comparatively small capital to create significant earnings, a significant competitive strength.
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Sound Financial Position and Cash Flow: Quality companies are not weighed down by high debt and produce cash steadily. The filter seeks a Debt-to-Free Cash Flow ratio below 5, meaning it would require fewer than five years of present cash flow to pay off all debt. Morningstar's ratio of 2.15 shows a very sound and workable debt situation. Additionally, the filter requires a 5-year average Profit Quality, which calculates how much net income becomes free cash flow, above 75%. Morningstar's number of 163.51% is excellent, showing the company produces much more cash than its reported earnings would indicate, offering great financial room for dividends, share repurchases, or strategic projects.
Fundamental Rating Summary
An examination of Morningstar's combined fundamental analysis report supports the image created by the filter. The company receives a total fundamental rating of 7 out of 10, with specific high points in earnings power and financial soundness.
- Profitability is rated 8/10, supported by leading returns on equity and invested capital that exceed most of its competitors in the capital markets sector. Both operating and earnings margins have displayed upward movement in recent years.
- Financial Health gets a firm 7/10. The report notes a good Altman-Z score and the very good Debt-to-FCF ratio, indicating low default risk and high ability to meet obligations. While liquidity measures are middling, they are seen as adequate considering the company's solid earnings power and stability.
- Growth is rated 6/10, with a good historical EPS growth rate and positive forecasts for future earnings and revenue expansion.
- Valuation receives a middle score of 5/10. The stock is not seen as inexpensive on a standard P/E basis, but the report states that its higher price may be reasonable given its high earnings power and projected expansion.
Investment Case and Points for Thought
For a quality investor, Morningstar offers a proposition founded on a lasting business model. Its function as a supplier of necessary, independent data and research builds repeat revenue and high customer retention. The data confirmed by the filter, high capital returns, good cash production, and earnings expansion, imply these competitive strengths are being effectively turned into financial performance.
Yet, quality investing also includes non-quantitative assessment. Investors must think about the company's place in a contested fintech field, its capability to keep pricing ability, and the long-term industry trends favoring demand for investment data and guidance. The present price, while possibly appropriate for a quality holding, needs an investor's belief in the company's long-term growth potential.
Finding Additional Quality Prospects
Morningstar is one instance found via a structured filtering process. Investors wanting to use similar standards to locate other possible quality holdings can execute the Caviar Cruise filter independently to see a wider list of companies that meet these numerical criteria.
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 thorough research and consider their individual financial circumstances before making any investment decisions.
