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 Telefonica SA (TEF - 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, Telefonica has a trailing twelve months PE ratio of 6.76, 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 20.06. If we focus on the stock’s long-term PE trend, the current level puts Telefonica’s current PE ratio below its midpoint over the past five years. Moreover, the current level is fairly below the highs for this stock, suggesting it might be a good entry point.
Further, the stock’s PE also compares favorably with its industry’s trailing twelve months PE ratio, which stands at 11.60. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Telefonica has a forward PE ratio (price relative to this year’s earnings) of 13.35, so it is fair to say that the stock price is likely to appreciate in the near future.
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, Telefonica has a P/S ratio of about 1.00. This is lower than the S&P 500 average, which comes in at 3.24 right now.
If anything, this suggests some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, Telefonica 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 Telefonica a solid choice for value investors.
What About the Stock Overall?
Though Telefonica 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 ‘B’ and a Momentum score of ‘A’. This gives TEF a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been encouraging. The current year and next has seen two estimates going higher in the past 30 days compared to none lower.
As a result, the current year consensus estimate has risen by 7.5% in the past two months, while the next year estimate has inched up by 11.6%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Telefonica SA Price and Consensus
Even though the company has better estimates trend, the stock has just a Zacks Rank #3 (Hold). That is why we are looking for in-line performance from the company in the near term.
Telefonica is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a strong industry rank (Top 14% out of more than 250 industries) further supports the growth potential of the stock. Also, over the past six months, the industry to which the stock belongs has clearly outperformed the broader market, as you can see below:
So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.
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