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 McDermott International, Inc. 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:

PE Ratio

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, McDermott has a trailing twelve months PE ratio of 13.1, 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 20.8. If we focus on the long-term PE trend, the current level is fairly below the highs for this stock over the past five years, suggesting it might be a good entry point.



Further, the stock’s PE also compares highly favorably with its industry’s trailing twelve months PE ratio, which stands at a negative 15.9. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.



P/S Ratio

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, McDermott has a P/S ratio of about 0.7. This is considerably lower than the S&P 500 average, which comes in at 3.3 right now.

If anything, this suggests some level of undervalued trading—at least compared to historical norms.

Broad Value Outlook

In aggregate, McDermott 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 McDermott 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 8.6, which is better than the industry average of 11.1. Clearly, MDR is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though McDermott 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 MDR 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 estimate go higher in the past thirty days compared to one lower, while the full year estimate has seen three up and none down in the same time period.

As a result, the current quarter consensus estimate now stands at a loss of 1 cent per share from earnings 2 cents per share a month ago. The current year estimate has moved north by 26.2% in the same time frame. You can see the consensus estimate trend and recent price action for the stock in the chart below:

McDermott International, Inc. Price and Consensus

This mixed trend is why the stock has just a Zacks Rank #3 (Hold) which is why we are looking for in-line performance from the company in the near term.

Bottom Line

McDermott is an inspired choice for value investors, as it is hard to beat its good lineup of statistics on this front. Moreover, a strong industry rank (Top 48% out of more than 250 industries) suggests broader factors support the growth potential of the company as well. However, with a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past one year, its industry has clearly underperformed the broader market, as you can see below:

However, a Zacks Rank #3 indicates that while the stock’s growth story is intact over the medium term, analysts have some apprehensions about the stock in the immediate future. So, value investors might want to wait for estimates, analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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It's not the one you think.
 

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