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 PacWest Bancorp (PACW - 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, PacWest has a trailing twelve months PE ratio of 16.75, 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 20.15. If we focus on the stock’s long-term PE trend, the current level puts PacWest’s current PE ratio somewhat below its midpoint (which is 17.48) over the past five years.
Further, the stock’s PE also compares favorably with the Zacks classified Banks - West industry’s trailing twelve months PE ratio, which stands at 19.26. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that PacWest has a forward PE ratio (price relative to this year’s earnings) of 16.04, so it is fair to say that a slightly more value-oriented path may be ahead for PacWest stock in the near term too.
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.
PacWest’s PEG ratio stands at just 1.51, compared with the Zacks Banks - West industry average of 1.65. This suggests a decent undervalued trading relative to its earnings growth potential right now.
Broad Value Outlook
In aggregate, PacWest 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 PACW 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 9.07, which is considerably better than the industry average of 14.85. Clearly, PACW is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though PacWest 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 ‘D’. This gives PACW 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 disappointing. The current quarter has seen one estimate go higher in the past sixty days and three lower, while the full year estimate has seen one upward and four downward revisions in the same time period.
This has had a noticeable impact on the consensus estimate, as the current quarter consensus estimate has fallen by 1.3% in the past two months, while the full year estimate has declined 2.3%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
This bearish 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.
PacWest is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, despite a good industry rank (top 10% out of more than 250 industries), a Zacks Rank #3, makes it hard to get too excited about this company overall. Nonetheless, over the past one year, the Zacks Banks-West sector has significantly outperformed 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.
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