Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Energy Transfer Equity, L.P. stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Energy Transfer has a trailing twelve months PE ratio of 14.05, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 compares in at about 19.86. If we focus on the stock’s long-term PE trend, the current level puts Energy Transfer’s current PE ratio significantly below its midpoint over the past five years (which is 31.75), with the number having been relatively stable over the past few months.
Further, the stock’s PE also compares favorably with the Zacks classified Oil and Gas - Production Pipeline - MLB industry’s trailing twelve months PE ratio, which stands at 22.93. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Energy Transfer has a forward PE ratio (price relative to this year’s earnings) of just 17.27. While this indicates the number is expected to rise, the company would still be relatively undervalued to its peers as well as the broader market.
P/S Ratio
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Energy Transfer has a P/S ratio of about 0.57. This is much lower than the S&P 500 average, which comes in at 2.97 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.
ETE is in the middle of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.
P/CF Ratio
An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, Energy Transfer’s P/CF ratio of 5.60 is significantly lower than the Zacks classified Oil and Gas - Production Pipeline - MLB industry average of 12.88, which indicates that the stock is undervalued in this respect too.
Broad Value Outlook
In aggregate, Energy Transfer currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. Clearly, ETE is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Energy Transfer might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘A’. This gives ETE a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
However, the company’s recent earnings estimates have been disappointing. The current quarter has seen two estimates go down in the past sixty days compared to none higher, while the full year estimate has seen a similar trend.
This has had a decidedly bearish impact on earnings estimates, as the current quarter consensus estimate has decreased by 14.3% over the past two months, while the full year estimate has gone down by 8.7%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
This bearish mixed trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term, despite robust value metrics.
Bottom Line
Energy Transfer is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a strong industry rank (Top 19% out of more than 250 industries) further supports the growth potential of the stock. Some broader factors are also turning favorable for the industry, which is expected to benefit from a rise in oil price post the production cap agreed upon by a number of OPEC members as well as non-OPEC nations.
However, with a Zacks Rank #3, it is hard to get too excited about this company overall. In fact. over the past two year, the Zacks Oil and Gas - Production Pipeline - MLB industry has underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick. Moreover, broader factors at the industry level support the growth potential of the company as well.
Zacks’ Best Private Investment Ideas
In addition to the recommendations that are available to the public on our website, how would you like to follow all Zacks' private buys and sells in real time?
Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Starting today, for the next month, you can have unrestricted access. Click here for Zacks' private trades >>
Image: Bigstock
Is Energy Transfer (ETE) a Good Pick for Value Investors?
Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?
One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Energy Transfer Equity, L.P. stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:
PE Ratio
A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.
On this front, Energy Transfer has a trailing twelve months PE ratio of 14.05, as you can see in the chart below:
This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 compares in at about 19.86. If we focus on the stock’s long-term PE trend, the current level puts Energy Transfer’s current PE ratio significantly below its midpoint over the past five years (which is 31.75), with the number having been relatively stable over the past few months.
Further, the stock’s PE also compares favorably with the Zacks classified Oil and Gas - Production Pipeline - MLB industry’s trailing twelve months PE ratio, which stands at 22.93. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Energy Transfer has a forward PE ratio (price relative to this year’s earnings) of just 17.27. While this indicates the number is expected to rise, the company would still be relatively undervalued to its peers as well as the broader market.
P/S Ratio
Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.
Right now, Energy Transfer has a P/S ratio of about 0.57. This is much lower than the S&P 500 average, which comes in at 2.97 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.
ETE is in the middle of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.
P/CF Ratio
An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, Energy Transfer’s P/CF ratio of 5.60 is significantly lower than the Zacks classified Oil and Gas - Production Pipeline - MLB industry average of 12.88, which indicates that the stock is undervalued in this respect too.
Broad Value Outlook
In aggregate, Energy Transfer currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. Clearly, ETE is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Energy Transfer might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘D’ and a Momentum score of ‘A’. This gives ETE a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
However, the company’s recent earnings estimates have been disappointing. The current quarter has seen two estimates go down in the past sixty days compared to none higher, while the full year estimate has seen a similar trend.
This has had a decidedly bearish impact on earnings estimates, as the current quarter consensus estimate has decreased by 14.3% over the past two months, while the full year estimate has gone down by 8.7%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Energy Transfer Equity, L.P. Price and Consensus
Energy Transfer Equity, L.P. Price and Consensus | Energy Transfer Equity, L.P. Quote
This bearish mixed trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term, despite robust value metrics.
Bottom Line
Energy Transfer is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a strong industry rank (Top 19% out of more than 250 industries) further supports the growth potential of the stock. Some broader factors are also turning favorable for the industry, which is expected to benefit from a rise in oil price post the production cap agreed upon by a number of OPEC members as well as non-OPEC nations.
However, with a Zacks Rank #3, it is hard to get too excited about this company overall. In fact. over the past two year, the Zacks Oil and Gas - Production Pipeline - MLB industry has underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick. Moreover, broader factors at the industry level support the growth potential of the company as well.
Zacks’ Best Private Investment Ideas
In addition to the recommendations that are available to the public on our website, how would you like to follow all Zacks' private buys and sells in real time?
Our experts cover all kinds of trades… from value to momentum . . . from stocks under $10 to ETF and option moves . . . from stocks that corporate insiders are buying up to companies that are about to report positive earnings surprises. You can even look inside exclusive portfolios that are normally closed to new investors. Starting today, for the next month, you can have unrestricted access. Click here for Zacks' private trades >>