For investors aiming to assemble a portfolio of lasting, high-achieving companies, the quality investing method provides a structured system. This system centers on finding businesses with durable competitive strengths, reliable earnings, and sound financial condition, with the plan of owning them for many years. One useful instrument for this process is the "Caviar Cruise" stock screen, which uses measurable filters to find companies displaying signs of quality, like high returns on capital, good cash flow production, and a record of earnings growth. A present example that meets this strict test is Zoetis Inc (NYSE:ZTS), a top worldwide animal health company.
A Portrait of Animal Health Leadership
Zoetis Inc is the biggest global maker of medicine and vaccines for pets and farm animals. Based in Parsippany, New Jersey, the company works around the world, selling its varied range of drugs, vaccines, diagnostics, and other products in about 45 countries. Its operations are divided between companion animals (such as dogs, cats, and horses) and livestock (including cattle, swine, and poultry), creating a stable mix of sales. This place in the necessary and increasing animal health field is the base of its quality investment argument.
Fitting the Caviar Cruise Standards
The Caviar Cruise screen judges companies on a number of important financial measures that are key to the quality investing idea. Zoetis shows notable force in these areas:
- High Return on Invested Capital (ROIC): A main part of quality investing, a strong ROIC shows a company's notable skill in creating earnings from its capital. Zoetis states an ROIC (leaving out cash, goodwill, and intangibles) of 38.3%, well above the screen's 15% minimum. This implies management is very good at using capital to build value for shareholders.
- Good and Getting Better Earnings: The screen looks for a history where profit growth is faster than sales growth, pointing to wider margins and pricing strength. Zoetis's 5-year EBIT (earnings before interest and taxes) CAGR of 10.8% is clearly higher than its sales growth, pointing to better operating performance and a strong market position.
- Sound Financial Condition: A reasonable debt level is important for long-term strength. The screen uses a Debt-to-Free Cash Flow ratio below 5. Zoetis's ratio of 3.2 means it could pay off all its debt with a little more than three years of present cash flow, showing a solid and adaptable balance sheet.
- Trustworthy Earnings: The "Profit Quality" measure looks at free cash flow next to net income, showing how much reported profit becomes actual cash. Zoetis's 5-year average of 82.3% is higher than the 75% standard, meaning its stated earnings are supported by good cash production, which can fund dividends, share repurchases, or new projects.
Fundamental Analysis Summary
A full fundamental analysis report for Zoetis gives the company a good total score of 7 out of 10, with special strength in earnings and financial health. The report highlights several of the screen's conclusions:
- Earnings Strength: Zoetis receives a high score of 9 for earnings. Its Return on Equity of 49.1% and Operating Margin of 38.3% rank it near the best in its pharmaceutical industry group. Both margins have increased in recent years.
- Firm Financial Base: With a health score of 7, the company displays no evidence of liquidity or solvency problems. Its Altman-Z score shows a very small chance of bankruptcy, and its current and quick ratios confirm enough ability to cover near-term needs.
- Reasonable Valuation and Growth: The valuation score of 6 suggests Zoetis is not inexpensive, but may be priced fairly for its high standard. While its Price-to-Earnings ratio is higher than the market norm, it is viewed as acceptable next to industry competitors. The growth score of 5 reflects a company in a steadier stage, with prior growth good but future projections slower—a typical feature for settled quality businesses.
The Quality Investment Argument
For a quality investor, Zoetis offers a strong profile that matches the strategy's main principles. The company works in a steady, need-based industry with long-term support from more pet ownership and food demand. Its global size, varied products, and direct sales network form a wide competitive barrier. Financially, it shows the signs of a quality grower: high returns on capital, wide and increasing margins, good cash flow, and a careful balance sheet. While its price is not low, quality investors frequently agree to pay a reasonable price for a better business with steady, lasting cash flows.
Finding More Quality Options
Zoetis is one case found using the Caviar Cruise screening method. Investors wanting to use this structured system to locate other companies with similar quality traits can review the screen settings and findings here: View the Caviar Cruise Stock Screen.
Disclaimer: This article is for information only and is not financial advice, a suggestion, or an offer to buy or sell any security. Investors should do their own study and think about their personal money situation before making any investment choices.
