For investors looking to assemble a portfolio of lasting, high-performing businesses, the quality investing philosophy offers a strong framework. This method centers on finding companies with durable competitive advantages, high profitability, and sound financials, with the goal of owning them for many years. One structured way to find these companies is the "Caviar Cruise" stock screen, which uses a set of numerical filters to find firms with very good past performance, high returns on capital, and trustworthy earnings. The screen focuses on measures like steady revenue and profit growth, a high return on invested capital (ROIC), sensible debt levels compared to free cash flow, and a good conversion of accounting profits into real cash.
A present leader from this screening process is Motorola Solutions Inc (NYSE:MSI), a worldwide leader in mission-critical communications and security solutions. A detailed look shows how its financial picture matches the central ideas of quality investing.
Match with Caviar Cruise Standards
The Caviar Cruise screen applies particular financial limits to find quality. Motorola Solutions not only reaches but frequently goes beyond these minimum needs, illustrating a financially sound and well-run business.
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Growth Steadiness: The screen requires at least a 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Motorola Solutions shows a revenue CAGR of 6.94% and a much stronger EBIT CAGR of 15.92%. That EBIT growth is much higher than revenue growth is a main screen filter and a vital quality sign. It points to better operational efficiency, pricing strength, or scale benefits, traits of a company with a lasting competitive edge.
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Outstanding Capital Effectiveness: Maybe the most significant measure for quality investors is the return on invested capital (ROIC), which shows how well a company produces profits from its capital. The Caviar Cruise screen sets a strict limit at >15%. Motorola Solutions performs very well here, with an ROIC (leaving out cash, goodwill, and intangibles) of 77.63%. This very high number shows the company needs little extra capital to increase its profits, a feature valued by long-term investors.
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Sound Financial Position & Cash Flow Trustworthiness: The screen checks debt sustainability by comparing total debt to free cash flow, looking for a ratio under 5. Motorola Solutions' ratio of 3.56 fits well within this limit, meaning the company could settle its debt in less than four years using its present cash flow. Also, the screen checks for high "profit trustworthiness," defined as the part of net income turned into free cash flow. A five-year average above 75% is needed. Motorola Solutions has an average of 120.5%, showing it creates more cash than its accounting profits report, a mark of careful earnings and good operational control.
Fundamental Analysis Summary
A look at Motorola Solutions' detailed fundamental report supports the screen's results. The company gets an overall fundamental score of 6 out of 10. Its leading trait is profitability, which scores a 9/10. The report notes industry-leading margins and returns, including an ROIC of 16.51% that is better than 92% of its communications equipment competitors.
The analysis also points out areas to note. Financial strength scores a 4/10, mainly because of a high debt-to-equity ratio, though this is partly balanced by a strong Altman-Z score and the acceptable Debt/FCF ratio found by the screen. Valuation is scored 3/10, with the stock trading at a Price-to-Earnings ratio of 29.46, which the report calls high. However, it also states this price is similar to the wider S&P 500 and lower than many industry competitors. Growth measures are good at 5/10, showing strong past EPS growth and forecasts for continued, though slightly slowing, increase.
Investment Points for Quality Investors
For an investor using a quality-focused, long-term ownership strategy, Motorola Solutions makes a strong argument. The company works in the necessary area of public safety and secure communications, a field with high entry obstacles and repeating income from software and services. Its financial numbers show the features quality investors want: excellent capital use (shown by outstanding ROIC), the capacity to increase profits quicker than sales, and solid creation of free cash flow.
The main point, as with any quality investment, is price. The present high cost shows the market's awareness of the company's strong qualities. A quality investor must determine if the long-term durability and growth potential support paying that high price now.
Interested in finding other companies that pass the Caviar Cruise quality screen? You can find and adjust the screen here.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The information presented should not be used as the sole basis for any investment decision. Investors are encouraged to conduct their own thorough research and consult with a qualified financial advisor before making any investment decisions.
