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 Michelin (MGDDY - 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, Michelin has a trailing twelve months PE ratio of 14.7, 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 20.4. If we focus on the long-term PE trend, Michelin’s current PE level puts it slightly above its midpoint over the past five years.
However, the stock’s PE compares unfavorably with the industry’s trailing twelve months PE ratio, which stands at 8.6. This indicates that the stock is relatively overvalued right now, compared to its peers.
Nonetheless, we should point out that Michelin has a forward PE ratio (price relative to this year’s earnings) of just 11.6, so it is fair to say that a slightly more value-oriented path may be ahead for Michelin 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, Michelin has a P/S ratio of about 1.2. This is lower than the S&P 500 average, which comes in at 3.3 right now. As we can see in the chart below, this is almost in line with the highs for this stock in particular over the past few years, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.
Broad Value Outlook
In aggregate, Michelin 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 Michelin a solid choice for value investors.
What About the Stock Overall?
Though Michelin 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 A and a Momentum score of B. This gives MGDDY 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 trending higher. The current year has not seen any estimate revision in the past sixty days, while the next year estimate has seen one upward and zero downward revisions in the same time period.
As a result, the current year consensus estimate has risen by 1.6% in the past two months, while the next year estimate has increased 1.9%.
This somewhat favorable trend is why the stock has a Zacks Rank #2 (Buy) and why we are looking for better performance from the company in the near term.
Michelin is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. With a formidable industry rank (among the Top 27%) and strong Zacks Rank, Michelin looks like a strong value contender. In fact, over the past five years, the industry has 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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