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 Discover Financial Services (DFS - 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, Discover Financial Services has a trailing twelve months PE ratio of 10.48, 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 20.36. If we focus on the long-term PE trend, Discover Financial Services’ current PE level puts it close to its midpoint over the past five years. Notably, the current level stands below the highs for the stock, hinting at some scope for entry.
Further, the stock’s PE also compares favorably with the Zacks classified Finance sector’s trailing twelve months PE ratio, which stands at 15.78. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Discover Financial Services’ forward PE is roughly same as its trailing twelve months value, so we might say that the forward earnings estimates are incorporated in the company’s share price as of now. We define forward PE as current price relative to the Zacks Consensus Estimate for the current fiscal year.
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, Discover Financial Services has a P/S ratio of about 2.22. This is lower than the S&P 500 average, which comes in at 3.16 right now. Also, as we can see in the chart below, this stands below the highs for this stock in particular over the past few years.
Broad Value Outlook
In aggregate, Discover Financial Services 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 Discover Financial Services a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for Discover Financial Services is just 1.11, a level that is slightly lower than the industry average of 1.48. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, DFS is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Discover Financial Services 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 DFS a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (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 four estimates go lower in the past sixty days compared to one upward revision, while the full year estimate has seen three down and two up in the same time period.
This has had a negative impact on the consensus estimate, as the current quarter consensus estimate has declined by 2.7% in the past two months, while the full year estimate has inched lower by 0.5%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
In light of these bearish trends, the stock has just a Zacks Rank #3 (Hold) which indicates that we are looking for in-line performance from the company in the near term.
Discover Financial Services 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 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 categorized Finance – Consumer Loans 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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