For investors looking to assemble a group of lasting, high-achieving companies, the ideas of quality investing present a useful structure. This method centers on finding businesses with durable competitive positions, reliable earnings, sound financial condition, and the capacity to produce high returns on capital over many years. One organized way to find these companies is the "Caviar Cruise" stock screen, which uses a set of strict numerical tests to find firms displaying these classic signs of quality.
A recent run of this screen has pointed to Bio-Techne Corp (NASDAQ:TECH) as a candidate for more detailed review. The Minneapolis-based life sciences company, which supplies important tools and reagents for research and clinical diagnostics, seems to fit several central standards that quality investors look for.
Fitting the Central Quality Tests
The Caviar Cruise screen is based on essential measures that show a company's past performance and operational strength. Bio-Techne's financial picture matches these standards well:
- Earnings Growth: The screen calls for at least a 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. Bio-Techne passes this easily, with a 5-year revenue CAGR of 7.1% and an EBIT CAGR of 12.0%. Notably, EBIT growth has been higher than revenue growth, a main test that points to better profitability and possible pricing strength or scale benefits.
- Effective Capital Use: A crucial measure for quality investors is Return on Invested Capital (ROIC), which shows how well a company produces profits from its capital. The screen requires an ROIC (leaving out cash, goodwill, and intangibles) over 15%. Bio-Techne's result of 25.4% is very high, indicating the company uses its capital very well to build value for shareholders.
- Financial Strength and Reliable Earnings: The screen checks balance sheet soundness by examining the Debt-to-Free Cash Flow ratio, favoring companies that could pay off all debt in under five years using their present cash flow. Bio-Techne's ratio of 1.2 is very good, showing little financial danger and high liquidity. Also, the "Profit Quality" measure, which weighs free cash flow against net income, averages 177.7% over five years for TECH. This means the company is producing much more cash than its reported earnings, a signal of very reliable, maintainable earnings.
Basic Condition and Price Considerations
A wider look at Bio-Techne's basic measures backs the view from the screen. The company's most recent fundamental analysis report gives it a total score of 6 out of 10, with high scores in profitability and financial condition.
- Profitability & Margins: The company scores well for its margins, with an Operating Margin of 22.6% that beats 93% of similar companies in the Life Sciences Tools & Services industry. Its Gross Margin of 66.6% is also solid.
- Financial Condition: Solvency and liquidity are clear positives. An Altman-Z score of 13.58 points to almost no chance of failure, and the good Debt-to-FCF and Current Ratios confirm a very strong balance sheet.
- Growth & Price: While past revenue and EPS growth have been steady, analysts expect a slower growth rate in the next few years. Price presents a varied view; with a P/E ratio near 33, TECH is priced similarly to the S&P 500 but seems more fairly priced compared to its industry group. For quality investors, who usually pay a "reasonable price for a very good company" instead of looking for the lowest price, the current valuation could be workable given the company's strong operational results and financial security.
A Candidate for More Study
The Caviar Cruise screen works as a useful first step, pointing out companies that have shown measurable high performance. Bio-Techne Corp's success with this filter, along with its strong fundamental report, makes it a notable candidate for quality investors. It displays the wanted mix of steady growth, high returns on capital, excellent financial condition, and reliable cash flows. While the screen points out numerical strengths, the final choice to invest for a quality investor would need to consider less numerical aspects like the strength of its competitive position in the life sciences field, the skill of its leadership, and the long-term industry trends helping its markets.
Interested in reviewing other companies that pass the Caviar Cruise quality screen? You can see and adjust the screen with the newest data here.
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Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. Investing has risks, including the possible loss of the amount invested. You should do your own complete research and talk to a qualified financial advisor before making any investment choices.
