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 Red Robin Gourmet Burgers, Inc. (RRGB Quick QuoteRRGB - Free Report) 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, Red Robin has a trailing twelve months PE ratio of 15.80. This level compares pretty favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 19.92.

If we focus on the long-term trend of the stock the current level puts Red Robin’s current PE near its lows. The current PE is well below its median for the term (which stands at 22.28), and the number has fallen rapidly over the past few months. Hence, we could infer that the stock is undervalued in this respect, especially in light of its historical trend. Thus, the present level seems to be a suitable entry point for the stock from a PE perspective.

Further, the stock’s PE also compares favorably with the Zacks classified Retail - Restaurants industry’s trailing twelve months PE ratio, which stands at 24.09. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers. In fact, since mid-2015, Red Robin has been consistently trading cheaper than the industry in terms of PE.

We should also point out that Red Robin has a forward PE ratio (price relative to this year’s earnings) of 16.71, higher than the current figure. Delving deeper into the PE’s inputs we observed that the company’s earnings are expected to see a slight dip this year, which would serve to inflate the PE ratio. As 2016 was the worst year for the restaurant industry since the end of recession, most restaurateurs experienced a similar fate. However, earnings are expected to continue following their previous growth trajectory 2017 onwards.

Also, while the Forward PE is higher than the current level, the company would still be relatively undervalued to its peers as well as the broader market.

PS 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, Red Robin has a P/S ratio of about 0.53. This is significantly lower than the Zacks categorized Retail – Restaurants industry average, which comes in at 3.14 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.

This clearly suggests some level of undervalued trading for RRGB—at least compared to historical norms.

Broad Value Outlook

In aggregate, Red Robin currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes Red Robin a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, its P/CF ratio (another great indicator of value) comes in at just 4.35, which is far better than the industry average of 11.17. Clearly, RRGB is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Red Robin 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 ‘A’ and a Momentum score of ‘F’. This gives RRGB a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)

Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics, and a good VGM score can increase your odds of success. All things considered, Red Robin seems to have pretty striking prospects.

However, the company’s recent earnings estimates have been going down lately. The current quarter consensus estimate has moved down nearly 7% over the past two months, while the full year estimate has declined 2.5%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Red Robin Gourmet Burgers, Inc. Price and Consensus

The combination of these somewhat mixed factors 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.

Bottom Line

Red Robin is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a somewhat sluggish industry rank (Bottom 45% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall.

The restaurant industry has been experiencing low consumption over the last few quarters as consumer discretionary spending in this space has been pretty sluggish. In addition, high labor costs as well as investments in several sales building initiatives like advertising and technical upgrades have been weighing on margins.

Notably, the industry has widely underperformed the broader market over the last year, as you can see below:

Despite such negative broader factors, the fact remains that Red Robin is undertaking various measures such as efficient menu innovation, focus on increasing speed of service, effective marketing strategy, unit expansion and remodeling programs to reinvigorate brands. All of these are expected to mark a turnaround for the company, after a dismal 2016, the signs of which are already beginning to show. This indicates that the company remains a strong value proposition.

So, value investors might want to wait for analyst sentiment to turn bullish in this name first, but once that happens, this stock could be a compelling pick.

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