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 Sally Beauty Holdings, Inc. (SBH - 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, Sally Beauty has a trailing twelve months PE ratio of 9.5, 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 21.6. If we focus on the stock’s long-term PE trend, the current level puts Sally Beauty’s current PE ratio way below its midpoint over the past three years.
Further, the stock’s PE also compares favorably with the industry’s trailing twelve months PE ratio, which stands at 14.4. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Sally Beauty has a forward PE ratio (price relative to this year’s earnings) of 7.2, so it is fair to say that a slightly 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, Sally Beauty has a P/S ratio of 0.6. This is lower than the S&P 500 average, which comes in at 3.5 right now.
If anything, this suggests some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, Sally Beauty 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 Sally Beauty a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the P/CF ratio (another great indicator of value) comes in at 6.3, which is better than the industry average of 7.8. Clearly, SBH is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Sally Beauty 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 D. This gives SBH 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 consensus estimate for the current quarter has moved north by 16.7% while that of the current year has increased by 19.2% in the past two months. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Sally Beauty Holdings, Inc. Price and Consensus
This bullish trend is why the stock boasts a Zacks Rank #1 (Strong Buy) and why we are expecting outperformance from the company in the near term.
Sally Beauty is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Boasting a good industry rank (among the top 14% of more than 260 industries) and a top Zacks Rank, the company deserves attention right now. However, over the past year, the industry has underperformed the broader market, as you can see below:
Despite the poor past performance of the industry, a good industry rank signals that the stock is likely to benefit from favorable broader factors in the immediate future. Add to this the positive estimate revisions and robust value metrics, and we believe that we have a strong value contender in Sally Beauty.
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