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 EQT Midstream Partners, LP (EQM - 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:
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, EQT Midstream has a trailing twelve months PE ratio of 14.79, 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 stands at about 20.18. If we focus on the long-term PE trend, EQT Midstream’s current PE level puts it below its midpoint of 16.47 over the past three years. In fact, the current level stands closer to the recent lows for the stock, suggesting that it could be a solid entry point.
Further, the stock’s PE also compares favorably with the Zacks classified Oils – Energy sector’s trailing twelve months PE ratio, which stands at 57.76. Clearly, this indicates that the stock is considerably undervalued right now, compared to its peers.
We should also point out that EQT Midstream has a forward PE ratio (price relative to this year’s earnings) of just 13.70, so it is fair to say that a slightly more value-oriented path may be ahead for EQT Midstream stock in the near term too.
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, EQT Midstream’s P/CF ratio of 10.32 is lower than the Zacks classified Oil & Gas – Production/Pipeline industry average of 17.85, which indicates that the stock is quite undervalued in this respect.
Broad Value Outlook
In aggregate, EQT Midstream 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 EQT Midstream a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for EQT Midstream is just 1.25, a level that is far lower than the industry average of 3.04. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate.
What About the Stock Overall?
Though EQT Midstream 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 ‘C’ and a Momentum score of ‘D’. This gives EQM a Zacks VGM score—or its overarching fundamental grade—of ‘C’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen one estimates go lower in the past sixty days compared to no upward revision, while the full year estimate has seen two upward and one downward revision in the same time period.
This has had a mixed impact on the consensus estimate, as the current quarter consensus estimate has slipped by 1.4% in the past two months, while the full year estimate has climbed 0.5%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
This 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.
EQT Midstream 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.
Though the Zacks categorized Oil & Gas – Production/Pipeline industry has underperformed the broader market in the last two years, the industry has been gathering momentum since the beginning of 2016, hinting at revival prospects. In fact, in the last one year, the Zacks classified Oil & Gas – Production/Pipeline industry has outperformed the broader market, which is clearly reflected in the chart below:
So, value investors might want to wait for estimates to turn around in this name first, but once that happens, this stock could be a compelling pick.
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