For investors aiming to assemble a portfolio of lasting, high-achieving businesses, the quality investing philosophy offers a useful framework. This method centers on finding companies with durable competitive strengths, reliable earnings, and sound financial condition, with the plan of owning them for many years. One structured way to locate these companies is the "Caviar Cruise" stock screen, built on ideas from quality investing. This screen looks for firms with past sales and earnings increases, high returns on capital, good cash flow generation, and reasonable debt. The aim is not to locate temporary discounts, but to point out businesses constructed to grow value over years.
A recent use of this screen has pointed to Zoetis Inc (NYSE:ZTS), the top animal health company globally. A look at its financial details shows several traits that match the quality investing standards, indicating it may deserve more attention from investors following this method.
Past Growth and Earnings Increase
A central idea of quality investing is the search for companies with a clear record of growth. The Caviar Cruise screen asks for at least a 5% compound annual growth rate (CAGR) for both sales and EBIT (earnings before interest and taxes) over five years. It also looks for companies where earnings growth is faster than sales growth, a sign of better operational effectiveness and possible pricing strength.
Zoetis satisfies these measures:
- EBIT Growth (5Y CAGR): 10.78%, clearly above the 5% minimum.
- Revenue Growth (5Y CAGR): 4.67%. This number is a bit under the screen's 5% limit, but context matters. The company's EBIT growth is much faster than its sales growth, a clear indicator of widening profitability. This points to Zoetis effectively using its operations, probably through scale benefits and product selection, to turn more of each dollar sold into operating earnings.
Outstanding Returns on Capital
Maybe the most important filter in the quality screen is a high Return on Invested Capital (ROIC). This number calculates how well a company uses its capital to produce profits. A high and steady ROIC is a key sign of a business with a lasting competitive edge. The screen searches for an ROIC (leaving out cash, goodwill, and intangibles) over 15%.
Zoetis performs very well here with an ROIC of 38.35%. This high number shows the company produces significant profit from its operational spending, putting it in the top group not only in its field, but in the entire market. It highlights the strength of its brand, product range, and market standing in animal health.
Financial Soundness and Cash Flow Character
Quality investors look for financial durability. The screen checks this using two main ratios: Debt-to-Free Cash Flow (FCF) and Profit Quality. A low Debt/FCF ratio indicates how fast a company could eliminate debt with its cash flow, while Profit Quality calculates how much of its net income becomes actual, usable free cash flow.
Zoetis shows a good view of financial condition:
- Debt / Free Cash Flow: 3.16. This means the company could repay all its debt in a little more than three years using its present FCF, fitting within the screen's acceptable limit of under 5. It shows debt is not excessive.
- Profit Quality (5y avg): 82.34%. This is above the 75% minimum, indicating that Zoetis consistently turns its reported profits into cash. This reliable earnings stream gives options to pay dividends, buy back shares, or reinvest without needing too much outside funding.
Fundamental Analysis Summary
An assessment of Zoetis's wider fundamental analysis report supports the results from the quality screen. The company receives a high total score, led by excellent results in profitability and financial health. Its margins lead the industry, and its solvency measures are good, backed by the healthy Debt/FCF ratio. The dividend, while providing a modest yield, has a steady and dependable growth record. The main point of attention in the report relates to price, which seems reasonable to somewhat high on an absolute scale, though more acceptable compared to similar companies. Growth is projected to persist, even if at a possibly slower rate than before.
Is Zoetis a Quality Investment Prospect?
Judging by the numerical filters of the Caviar Cruise screen, Zoetis presents a good argument. It shows the signs quality investors want: a record of earnings growth exceeding sales, a very high return on capital that indicates a strong competitive position, good free cash flow production, and a sensible debt amount. These numbers point to a capable business in a steady, necessary industry, animal health, which has stable qualities.
For investors wanting to review other companies that meet similar strict quality filters, the Caviar Cruise screen can be a useful first step. You can see and adjust the screen to view present outcomes here.
Disclaimer: This article is for information only and is not financial guidance, a suggestion to purchase or sell any security, or a support of any investment plan. Investors must perform their own complete investigation and think about their personal financial situation and risk capacity before making any investment choices.
