For investors looking to assemble a group of lasting, high-achieving businesses, the quality investing philosophy offers a useful framework. This method centers on finding companies with durable competitive strengths, high profitability, and sound financial condition, with the plan of owning them for a long time. One organized way to find these companies is the "Caviar Cruise" stock screen, which selects for firms showing steady revenue and profit expansion, high returns on invested capital, good cash flow production, and reasonable debt. A recent run of this screen has identified Parker Hannifin Corp (NYSE:PH) as a candidate for more review by investors focused on quality.
Matching the Main Quality Standards
The Caviar Cruise screen uses several numerical filters to search for quality traits. Parker Hannifin's financial results show a good fit with these main ideas:
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Continued Expansion: The screen looks for a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Parker Hannifin surpasses both requirements, with a revenue CAGR of 5.55% and a higher EBIT CAGR of 18.50%. Importantly, EBIT expansion is much faster than revenue growth, a main screen filter that points to better operational efficiency and possible pricing strength, signs of a quality business with competitive edges.
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Outstanding Capital Use: A central idea of quality investing is a high return on invested capital (ROIC), which shows how well a company produces profits from its capital. The screen demands an ROIC (leaving out cash, goodwill, and intangibles) over 15%. Parker Hannifin's number of 69.54% is very high, showing the company's engineering and manufacturing skill creates large value from each dollar invested.
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Good Financial Condition and Cash Flow: Quality companies are not just profitable but also financially secure. The screen checks this by examining the Debt-to-Free Cash Flow (FCF) ratio, favoring companies that could pay off all debt in five years using their present cash flow. Parker Hannifin's ratio of 2.96 fits in this safe area. Also, the screen looks for "high quality" profits by asking that, on average, at least 75% of net income becomes free cash flow over five years. Parker Hannifin's average Profit Quality of 125.58% shows it produces more cash than its accounting profits indicate, giving it important financial options for dividends, share repurchases, or strategic spending.
Basic Profile Summary
A look at Parker Hannifin's wider basic report supports its quality profile. The company receives a high mark for profitability, with industry-leading margins and returns. Its financial health is mostly sound, helped by a reasonable debt level and a good Altman-Z score, although its liquidity ratios (current and quick ratios) are seen as points of relative softness compared to industry others.
The main point for investors now is valuation. The report states that Parker Hannifin sells at a high price, with a Price-to-Earnings (P/E) ratio above both its own history and the wider market. This is a common issue when looking for quality companies; they are seldom low-priced. The company's growth path stays positive, with forecasts for ongoing, though possibly more moderate, earnings and revenue increases in the near future.
You can see the full, itemized basic review for Parker Hannifin Corp here.
A Business Made for Long Holding
Beyond the figures, Parker Hannifin's business model fits the non-numerical points quality investors frequently want. As a top producer of motion and control technologies, its products are necessary parts in aerospace, industrial manufacturing, and infrastructure. This provides a varied and repeating revenue source. The company's attention to highly engineered solutions fosters long-term customer ties and creates switching costs, adding to the lasting competitive edge that quality investing methods try to find.
Locating Other Quality Possibilities
Parker Hannifin shows the kind of company the Caviar Cruise screen is made to find. For investors wanting to study other businesses that meet these strict tests for expansion, profitability, and financial soundness, the screen can be a helpful beginning point.
You can see and adjust the present Caviar Cruise screen outcomes here.
Disclaimer: This article is for information only and is not financial guidance, a support, or a suggestion to buy, sell, or keep any security. The information given is based on supplied data and should not be the only reason for an investment choice. Investors should do their own complete study and think about their personal money situation and risk comfort before making any investment.
