Tetra Tech Inc (NASDAQ:TTEK) Excels as a Quality Investment with Strong Growth and Profitability

Tetra Tech Inc (NASDAQ:TTEK) has become a notable option for quality investors via the Caviar Cruise screening method, which finds firms with solid past results, strong profitability, and lasting financial condition. This method focuses on long-term ownership of companies showing steady revenue and earnings increases, high returns on invested capital, acceptable debt, and excellent cash conversion, all traits that point to operational strength and competitive staying power.

Historical Growth and Profitability

A key part of quality investing is finding companies with a clear history of growth and rising profitability. Tetra Tech does well here, with a 5-year EBIT compound annual growth rate (CAGR) of 19.68%, greatly exceeding its revenue growth of 2.60% over the same time. This difference is especially important as it shows the company’s skill in growing its operating profit quicker than its revenue, a signal of operational effectiveness, pricing strength, or scale benefits. For quality investors, this measure implies that Tetra Tech is not just expanding but is also becoming more profitable, supporting the durability of its business model.

Return on Invested Capital

Another vital filter in the Caviar Cruise screen is return on invested capital (ROIC), which gauges how well a company produces profits from its capital investments. Tetra Tech states an ROIC of 83.34% when leaving out cash, goodwill, and intangibles, much higher than the screen’s lowest requirement of 15%. This outstanding return shows that management is very effective in directing capital to profitable ventures, a main feature wanted by quality investors who value stewardship and long-term value building over immediate results.

Financial Health and Cash Flow

Quality investing also focuses on financial strength, which Tetra Tech shows through its solid balance sheet and cash flow measures. The company’s debt-to-free-cash-flow ratio is 1.95, notably under the screen’s highest point of 5. This means Tetra Tech could pay off all its debt in less than two years using its present free cash flow, a sign of minimal financial danger and high solvency. Also, the company’s 5-year average profit quality, which matches free cash flow to net income, is 124.37%, showing it produces more cash than accounting profits. This high cash conversion aids in debt control and also allows for dividends, share repurchases, or funding for future expansion.

Fundamental Analysis Overview

Per ChartMill’s fundamental report, Tetra Tech has an overall score of 6 out of 10, showing a varied but mostly good evaluation against industry rivals. Main positives involve:

• Solid profitability measures, with better results in return on equity (12.41%) and return on invested capital (13.77%) compared to many peers.
• A sound solvency position, helped by a low debt-to-equity ratio and a strong Altman-Z score suggesting minimal bankruptcy risk.
• Steady past growth in revenue and earnings per share, although future revenue growth estimates are conservative.

Points to note include a somewhat high P/E ratio of 23.93, which might worry value-focused investors, and a dividend yield of 0.70% that, while maintainable, is under industry and S&P 500 norms. Still, for quality investors who value business health over price, these items may be less important.

Alignment with Quality Investing Principles

Beyond numbers, Tetra Tech fits the non-number aspects of quality investing. The company works in consulting and engineering services with attention on water, environment, and infrastructure, areas pushed by long-term global movements like sustainability, climate adaptation, and renewable energy shift. Its two-segment setup, helping both government and business customers globally, offers revenue variety and lowers cyclical risk. Also, its focus on "leading with science" indicates a lasting competitive edge built on knowledge and standing, which can lead to pricing strength and client loyalty.

Reviewing Other Quality Options

Tetra Tech is one of multiple companies found through the Caviar Cruise screen. Investors wanting to see other quality options can check the complete screening outcomes here.

Disclaimer: This article is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Investors should conduct their own research and consult with a financial advisor before making investment decisions.