For investors aiming to assemble a portfolio of lasting, superior businesses, the quality investing philosophy offers a persuasive framework. This method centers on finding companies with durable competitive strengths, reliable profitability, sound financial condition, and the capacity to produce increasing returns on capital over many years. Instead of searching for steep discounts, quality investors frequently accept a fair price for outstanding businesses they can hold for a long time. One organized method to find these companies is through a strict stock screening process, like the "Caviar Cruise" screen, which selects for measurable signs of quality such as solid revenue and profit growth, high returns on invested capital, strong free cash flow conversion, and acceptable debt.
A recent run of this screen highlighted TE Connectivity PLC (NYSE:TEL) as a notable candidate. The Swiss-American manufacturer of connectors and sensors is a vital but frequently unnoticed parts supplier for transportation, industrial automation, data centers, and medical technology. Its presence on the screen implies its financial characteristics match the strict measures quality investors value.
Matching the Central Quality Standards
The Caviar Cruise screen uses several basic filters to separate companies with a record of high performance and a firm financial foundation. TE Connectivity's reported numbers show it meets these requirements well.
-
Continued Growth: The screen demands at least a 5% compound annual growth rate (CAGR) for both revenue and EBIT (earnings before interest and taxes) over five years. TE Connectivity surpasses this easily, with a 5-year revenue CAGR of 8.76% and an EBIT CAGR of 14.36%. Significantly, its EBIT growth is faster than its revenue growth, a main screen filter that points to better operational efficiency and possible pricing strength, signs of a quality business with competitive edges.
-
Outstanding Capital Efficiency: A central part 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 requires an ROIC (leaving out cash, goodwill, and intangibles) over 15%. TE Connectivity's number of 28.87% is impressive, showing the company uses capital very effectively and creates substantial value for shareholders.
-
Financial Strength and Cash Flow Integrity: Quality companies are both profitable and financially secure. The screen assesses this by examining the Debt-to-Free Cash Flow ratio (favoring a number under 5) and Profit Quality (the 5-year average ratio of free cash flow to net income, favoring above 75%).
- TE's Debt/FCF ratio of 1.82 is very good, meaning it could pay off all its debt with less than two years of current free cash flow. This shows a solid balance sheet and limited financial risk.
- Its 5-year average Profit Quality of 109% is excellent, indicating that over this time, the company turned more than 100% of its accounting profits into actual, usable free cash flow. This high-integrity earnings stream allows for flexibility for dividends, share repurchases, or strategic investment.
A High-Level Fundamental Perspective
An examination of TE Connectivity's detailed fundamental analysis report supports the screening outcome. The report gives the stock a firm overall rating of 7 out of 10, with notable high points in profitability and financial condition.
- Profitability High Point: With a score of 8/10, the company's margins and returns are first-rate in its industry. Its operating margin close to 20% and ROIC near 14% beat most competitors. While the net profit margin has faced some recent reduction, the core operating profitability remains solid.
- Firm Financial Condition: Scoring 7/10, the company's balance sheet is in good order. The very good Debt/FCF ratio and a safe Altman-Z score indicate low bankruptcy risk. While some short-term liquidity ratios are typical compared to peers, they are sufficient given the company's high profitability and cash production.
- Fair Valuation & Growth: The valuation score of 6/10 implies the stock is not inexpensive, but may be priced fairly for its quality. Its P/E ratio matches the wider market but appears appealing next to its own industry. This pairs with a positive growth expectation, with analysts projecting both earnings and revenue to keep growing at a high-single to low-double-digit rate.
Is TE Connectivity a Quality Compounders?
For the quality investor, the attraction of TE Connectivity is in the mix of these elements. It functions as a necessary provider in long-term, foundational growth areas like vehicle electrification, industrial automation, and cloud computing. Its financial numbers, high and rising returns on capital, superior free cash flow production, and a careful debt structure, suggest it has the economic advantage and orderly management that quality approaches look for. The company also backs its quality standing with a steady and rising dividend, having raised its payout for more than ten years.
The Caviar Cruise screen is built to identify companies deserving of more detailed study for a long-term portfolio. TE Connectivity's success with its filters builds a persuasive argument for this additional review.
Find More Quality Candidates The Caviar Cruise screen can be a useful beginning for creating a watchlist. You can view the present screen results and modify the settings yourself using the Caviar Cruise stock screener.
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 research and consult with a qualified financial advisor before making any investment decisions.
