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 Allergan plc 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, Allergan has a trailing twelve months PE ratio of 16.51, 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 Allergan’s current PE ratio below its midpoint over the past five years.
Further, the stock’s PE also compares favorably with the Zacks classified Medical sector’s trailing twelve months PE ratio, which stands at 18.06 At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Allergan has a forward PE ratio (price relative to this year’s earnings) of just 13.39, so it is fair to say that a slightly more value-oriented path may be ahead for Allergan stock in the near term too.
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, Allergan’s P/CF ratio of 4.03 is lower than the Zacks classified Medical-Generic Drugs industry average of 6.35, which indicates that the stock is somewhat undervalued in this respect.
PEG Ratio
While earnings are certainly important, it is essential to know how much you are paying for the growth of earnings as well. One can easily do that with the PEG ratio (ratio of the P/E to the expected future earnings growth rate).The PEG ratio gives a more complete picture of the valuation of a stock than the P/E ratio.
Apple’s PEG ratio stands at just 1.02, compared with the Zacks Medical-Generic Drugs industry average of 1.09. This suggests somewhat undervalued trading relative to its earnings growth potential right now.
Broad Value Outlook
In aggregate, Allergan currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes Allergan a solid choice for value investors.
What About the Stock Overall?
Though Allergan 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 ‘F’ and a Momentum score of ‘D’. This gives AGN a Zacks VGM score—or its overarching fundamental grade—of ‘D’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been encouraging. The current quarter has seen five estimates go higher in the past sixty days compared to one lower, while the full year estimate has seen four upward revisions and one downward revision in the same time period.
This has had just a small impact on the consensus estimate though as the current quarter consensus estimate has risen by 0.5% in the past two months, while the full year estimate has inched higher by 0.1%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Despite the rising trend, 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
Allergan is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (Bottom 43% out of over 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Medical-Generic Drugs industry has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates, analyst sentiment and broader factors to turn around in this name first, but once that happens, this stock could be a compelling pick.
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Should Value Investors Choose Allergan (AGN)?
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 Allergan plc 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, Allergan has a trailing twelve months PE ratio of 16.51, 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 Allergan’s current PE ratio below its midpoint over the past five years.
Further, the stock’s PE also compares favorably with the Zacks classified Medical sector’s trailing twelve months PE ratio, which stands at 18.06 At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Allergan has a forward PE ratio (price relative to this year’s earnings) of just 13.39, so it is fair to say that a slightly more value-oriented path may be ahead for Allergan stock in the near term too.
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, Allergan’s P/CF ratio of 4.03 is lower than the Zacks classified Medical-Generic Drugs industry average of 6.35, which indicates that the stock is somewhat undervalued in this respect.
PEG Ratio
While earnings are certainly important, it is essential to know how much you are paying for the growth of earnings as well. One can easily do that with the PEG ratio (ratio of the P/E to the expected future earnings growth rate).The PEG ratio gives a more complete picture of the valuation of a stock than the P/E ratio.
Apple’s PEG ratio stands at just 1.02, compared with the Zacks Medical-Generic Drugs industry average of 1.09. This suggests somewhat undervalued trading relative to its earnings growth potential right now.
Broad Value Outlook
In aggregate, Allergan currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes Allergan a solid choice for value investors.
What About the Stock Overall?
Though Allergan 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 ‘F’ and a Momentum score of ‘D’. This gives AGN a Zacks VGM score—or its overarching fundamental grade—of ‘D’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been encouraging. The current quarter has seen five estimates go higher in the past sixty days compared to one lower, while the full year estimate has seen four upward revisions and one downward revision in the same time period.
This has had just a small impact on the consensus estimate though as the current quarter consensus estimate has risen by 0.5% in the past two months, while the full year estimate has inched higher by 0.1%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Allergan PLC Price and Consensus
Allergan PLC Price and Consensus | Allergan PLC Quote
Despite the rising trend, 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
Allergan is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (Bottom 43% out of over 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Medical-Generic Drugs industry has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates, analyst sentiment and broader factors to turn around in this name first, but once that happens, this stock could be a compelling pick.
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 >>