For investors aiming to assemble a portfolio of durable, long-term holdings, the quality investing philosophy offers a strong framework. This method centers on finding companies with lasting competitive strengths, sound financial condition, and reliable profitability, businesses that can be held indefinitely. The Caviar Cruise stock screen, based on the ideas of quality investing, uses a set of numerical filters to search for these companies. It seeks solid historical revenue and profit expansion, high returns on invested capital, dependable cash flow creation, and a careful debt structure. One company that now meets this strict screening is Sterling Infrastructure Inc (NASDAQ:STRL).
Meeting the Core Quality Criteria
Sterling Infrastructure’s financial condition matches the main measures sought by the Caviar Cruise screen. The company’s results over the last five years show the steady, profitable expansion that quality investors seek.
- Profitable Growth: The screen demands a minimum 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes). STRL surpasses this, with a 5-year revenue CAGR of 11.7% and a notable EBIT CAGR of 44.5%. Importantly, EBIT expansion has greatly exceeded revenue expansion, a clear sign of better operational efficiency and possible pricing strength.
- Outstanding Capital Efficiency: A central idea of quality investing is a high return on invested capital (ROIC), which gauges how well a company produces profits from its capital base. The screen looks for an ROIC (excluding cash, goodwill, and intangibles) above 15%. STRL’s present ROICexgc of about 182.8% is very high, indicating the company’s main operations are very efficient at building shareholder value.
- Dependable Cash Flow and Balance Sheet Condition: Quality companies produce strong free cash flow and handle debt carefully. The screen requires a Debt-to-Free Cash Flow ratio under 5, meaning all debt could be paid off within five years using current cash flow. STRL’s ratio of 0.81 is very good, showing a solid balance sheet. Also, its 5-year average Profit Quality, the change of net income into free cash flow, is over 200%, well above the 75% minimum, emphasizing the reliability of its reported earnings.
A High-Level Fundamental View
An examination of Sterling Infrastructure’s fundamental analysis report gives a wider setting for these screening outcomes. The report gives STRL a total rating of 6 out of 10, stating its strong points are mainly in profitability and financial condition, which build a firm base for a quality stock.
- Profitability (Score: 8/10): The company scores very well here, with sector-leading margins and returns. Its Operating Margin of 16.0% and Profit Margin of 14.1% are better than over 90% of its Construction & Engineering industry group. The solid and improving ROIC further supports superior capital use.
- Condition (Score: 7/10): The balance sheet is strong. The excellent Debt-to-FCF ratio is supported by a sound Debt-to-Equity ratio of 0.27. An Altman-Z score of 7.31 shows very low bankruptcy danger. The report mentions a low current ratio, but explains that given the company's very good solvency and profitability, it may not point to a basic liquidity problem.
- Growth (Score: 6/10): STRL displays a solid history, with EPS expanding at a 54.2% CAGR over recent years. Analysts think this steady expansion will persist, with future EPS and revenue expansion forecast at almost 20% and 11.7% per year, in order.
- Valuation (Score: 3/10): This is the significant caution. The report notes STRL as "quite expensive" based on its Price/Earnings ratio of 44.95. While its Price/Free Cash Flow ratio is more attractive compared to industry groups, valuation is the main element reducing the total fundamental score. For quality investors, this highlights the need to pay a reasonable, but not extreme, price even for a very good business.
Is STRL a Quality Investment Candidate?
Sterling Infrastructure makes a strong argument for more study by quality-oriented investors. It successfully passes a screen made to find companies with lasting competitive strengths, shown by high and increasing margins and outstanding returns on capital. Its financial base is very solid, with little debt load and excellent cash flow creation. The company works in necessary infrastructure areas (e-commerce related data centers, transportation, and residential building), which may provide some economic downturn stability and match with lasting social directions.
However, the quality investing philosophy includes more than numerical screens. It needs qualitative assessment of a company's lasting advantage, the skill of its leadership, and the long-term outlook of its markets. Also, the present high valuation needs thoughtful study. An investor must determine if STRL’s expansion path and quality traits support its price within their own portfolio and valuation approach.
Interested in examining other companies that meet the Caviar Cruise quality screen? You can locate and adjust the screen for your own study here.
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. You should conduct your own thorough research and consider consulting with a qualified financial advisor before making any investment decisions.
