For investors aiming to assemble a portfolio of lasting, well-managed businesses, the quality investing philosophy offers a useful framework. This method centers on finding companies with durable competitive strengths, reliable profitability, and sound financial condition, with the plan of owning them for many years. One practical way to locate these companies is the "Caviar Cruise" stock screen, built on the ideas of quality investing. This screen uses a set of numerical filters to locate firms with a record of stable revenue and profit increase, superior returns on invested capital, solid cash flow generation, and reasonable debt. A present example that meets this strict screening is Quanta Services Inc (NYSE:PWR).
Meeting the Core Quality Criteria
Quanta Services, a top provider of specialized contracting services for electric power, renewable energy, and communications infrastructure, displays several important traits that match the quality investing screen. The screen's filters are made to find businesses that are increasing profitably and effectively.
- Continued Increase: The screen looks for at least a 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Quanta Services goes beyond this, with a 5-year revenue CAGR of 13.8% and an EBIT CAGR of 17.9%. Notably, its EBIT increase is faster than its revenue increase, a signal of better operational efficiency and possible pricing strength.
- Superior Capital Efficiency: A main idea of quality investing is evaluating how effectively a company produces profits from the capital it uses. The Caviar Cruise screen requires a Return on Invested Capital (excluding cash, goodwill, and intangibles) over 15%. Quanta Services meets this with an ROICexgc of 19.3%, showing it creates significant value from its main business investments.
- Sound Cash Flow and Reasonable Debt: Quality companies produce actual cash. The screen checks for an average "Profit Quality" (Free Cash Flow/Net Income) over 75% across five years. Quanta Services performs well here, with a result of 138.1%, meaning it turns net income into free cash flow at a high rate. This solid cash generation supports a good balance sheet, its Debt-to-Free Cash Flow ratio of 4.5 is within the screen's acceptable limit of under 5, indicating it could pay off all debt in less than five years using current cash flow.
Fundamental Analysis Overview
An examination of Quanta Services' wider fundamental situation gives background for these screening outcomes. According to a detailed fundamental analysis, the company shows a varied but generally positive profile for a growth-focused quality investor.
The analysis gives PWR a neutral profitability score, observing its margins are generally similar to industry peers but have seen steady improvement lately. Its financial condition is also rated neutral, helped by a firm Altman-Z score showing low bankruptcy risk, but affected by a share count that has risen over time. The most notable areas are its increase and valuation.
- Increase Strength: PWR receives a solid growth rating of 7 out of 10. The company has shown notable historical increase in both revenue and earnings per share, and analysts expect this strong momentum to persist.
- Valuation Note: The main point of caution relates to valuation, where PWR scores a 2 out of 10. The stock is priced at a higher level based on standard price-to-earnings measures, compared to both the wider S&P 500 and its own industry. This higher price, however, seems to directly mirror the company's better increase path, a typical situation for high-quality companies in growing markets.
Investment Thesis and Considerations
For a quality investor, Quanta Services represents an investment in long-term, structural trends, specifically, the upgrade of North America's older power grid, the large construction of renewable energy generation, and the growth of broadband and 5G communication networks. Its necessary role in these lasting growth areas supports the steady demand seen in its financials.
The company's success with the Caviar Cruise filters indicates it has the operational skill and financial control quality investors look for, the capacity to grow profitably, produce high returns on capital, and create significant cash. While its present valuation commands a higher price, the quality investing philosophy often agrees to pay a reasonable price for a superior business, if the long-term growth story stays firm. Investors must decide if the expected future increase supports the current multiple.
Finding Other Quality Candidates
Quanta Services shows the kind of company the Caviar Cruise screen is made to find. Investors wanting to locate other businesses that satisfy these strict standards for profitable increase, high returns, and financial soundness can use the screen themselves.
You can find the complete Caviar Cruise screen and its present results here: Caviar Cruise Stock Screener.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, an endorsement, or a recommendation to buy, sell, or hold any security. Investing involves risk, including the potential loss of principal. Readers should conduct their own research and consult with a qualified financial advisor before making any investment decisions.
