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 Party City Holdco Inc. (PRTY - 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, Party City has a trailing twelve months PE ratio of 14.4, 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 20.3. If we focus on the stock’s long-term PE trend, the current level puts Party City’s current PE ratio above its midpoint over the past two years, with the number having remained stable lately.
Further, the stock’s PE also compares favorably with the Zacks classified Consumer Products – Discretionary industry’s trailing twelve months PE ratio, which stands at 20.5. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Party City has a forward PE ratio (price relative to this year’s earnings) of just 13.02, so it is fair to say that a slightly more value-oriented path may be ahead for Party City stock in the near term too.
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, Party City has a P/S ratio of just 0.8. This is much lower than the S&P 500 average, which comes in at 3.1 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 couple of years.
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, Party City’s P/CF ratio of 9.5 is also lower than the Zacks classified Consumer Products - Discretionary industry average of 13.7, which indicates that the stock is undervalued in this respect too.
Broad Value Outlook
In aggregate, Party City 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 Party City a solid choice for value investors.
What About the Stock Overall?
Though Party City 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 PRTY 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 two estimates go higher in the past sixty days compared to none lower, while the full year estimate has seen none up and one down 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 4% in the past two months, while the full year estimate has inched lower by 0.8%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
This somewhat 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.
Party City is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, the company operates in an industry with a strong rank (Top 12% compared to over 250 industries). However, a Zacks Rank #3, makes it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Consumer Products - Discretionary industry has clearly underperformed 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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