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 Energy Transfer Equity, L.P. 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, Energy Transfer Equity has a trailing twelve months PE ratio of 19.8, 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 21.1. If we focus on the stock’s long-term PE trend, the current level puts Energy Transfer Equity’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.
Furthermore, the stock’s PE also compares favorably with its sector’s trailing twelve months PE ratio, which stands at 28.4. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Energy Transfer Equity has a forward PE ratio (price relative to this year’s earnings) of 16.9, so it is fair to say that a more value-oriented path may be ahead for the 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, Energy Transfer Equity has a P/S ratio of 0.4. This is 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, Energy Transfer Equity 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 Energy Transfer Equity a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the Price/Book ratio for Energy Transfer Equity is 0.7, a level that is lower than the industry average of 1.4. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Additionally, its P/CF ratio (another great indicator of value) comes in at 3.6, which is far better than the industry average of 8.4. Clearly, ETE is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Energy Transfer Equity 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 F. This gives ETE 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 discouraging. The current year has seen no estimate go higher in the past sixty days compared to four movements in the opposite direction, while the next year estimate has seen three up and three down over the same time period.
As a result the current year consensus estimate has decreased 23.2% in the past two months, while the next year estimates has moved down by 18.6%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Energy Transfer Equity, L.P. Price and Consensus
This negative trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.
Energy Transfer Equity 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 (bottom 32%) and a Zacks Rank #3, it is hard to get too excited about this company overall. Also, over the past two years, its industry has underperformed the broader market, as you can see below:
So, value investors might want to wait for the broader factors, analysts’ sentiment and estimates to turn around in this name first, but once that happens, this stock could be a compelling pick.
Wall Street’s Next Amazon
Zacks EVP Kevin Matras believes this familiar stock has only just begun its climb to become one of the greatest investments of all time. It’s a once-in-a-generation opportunity to invest in pure genius.
Click for details >>