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 Continental Aktiengesellschaft (CTTAY Quick QuoteCTTAY - 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, Continental has a trailing twelve months PE ratio of 13.60. This level compares favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.18.

If we focus on the long-term trend of the stock the current level puts Continental’s current PE near to its median (which stands at 13.60) over the past five years. Moreover, the current level is much below the highs experienced for the stock. However, being near the median, the current level does not provide us with a conclusive direction as to the valuation of the stock, relative to its own historical trend.

 
Notably, the stock’s PE compares similarly with the Zacks classified Automotive - Original Equipment industry’s trailing twelve months PE ratio, which stands at 13.00. At the very least, this indicates that the stock is somewhat similarly valued right now, compared to its peers.

We should also point out that Continental has a forward PE ratio (price relative to this year’s earnings) of 12.05 – which is lower than the current figure. So it is fair to say that a slightly more value-oriented path may be ahead for Continental stock in the near term too.

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, Continental has a P/S ratio of about 0.93. This is slightly higher than the Zacks categorized Automotive - Original Equipment industry average, which comes in at 0.80 right now. Nevertheless, a P/S ratio of less than 1 is generally a good signal.

Notably, CTTAY is actually towards the higher zone of its trading range in the time period per the P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.

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, Continental’s P/CF ratio of 7.95 is lower than the Zacks classified Automotive - Original Equipment industry average of 8.27, which indicates that the stock is somewhat undervalued in this respect.

Broad Value Outlook

In aggregate, Continental 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 Continental a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, its P/B ratio (used to compare a stock's market value to its book value) stands at 2.59, lower than the industry average of 2.72. Additionally, the EV/EBITDA for Continental is just 6.19, a level that is lower than the industry average of 6.51. The EV/EBITDA multiple (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) is capital structure-neutral, as it takes into account the level of debt on a company’s balance sheet, not just its equity. Since the Automotive - Original Equipment industry is highly capital-intensive, it makes sense to compare based on this ratio too.

Clearly, CTTAY is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Continental 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 ‘A’. This gives CTTAY 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, Continental seems to have pretty striking prospects.

Meanwhile, the company’s recent earnings estimates have been trending upwards lately. The current year has seen one estimate go higher in the past thirty days compared to one lower, while the next year estimate has seen one upward revision and no downward revisions in the same time period.

This has had a small but meaningful impact on the consensus estimate as the current quarter consensus estimate has increased 3% over the past month, while the full year estimate has inched higher by 1.6%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Continental AG Price and Consensus

The stock holds a Zacks Rank #3 (Hold), which indicates expectations of in-line performance from the company in the near term. However, Continental is enjoying bullish analyst sentiment, as indicated by the positive estimate revisions, and this works in the company’s favor.

Bottom Line

Continental is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Although boasting of a formidable industry rank (Top 11% out of more than 250 industries), the company’s Zacks Rank #3 somewhat dims the sparkle.

Notably, the Automotive - Original Equipment industry has outperformed the broader market over the last year, as you can see below:

 
So, despite a Zacks Rank #3, we believe that bullish analyst sentiment and favorable industry factors make this stock a compelling value pick.

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