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 Shire plc 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, Shire has a trailing twelve months PE ratio of 10.9, 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. If we focus on the long-term PE trend, Shire’s current PE level puts it below its midpoint over the past five years.
Further, the stock’s PE also compares favorably with the industry’s trailing twelve months PE ratio, which stands at 77.4. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Shire has a forward PE ratio (price relative to this year’s earnings) of just 11 which is roughly in line with the current level. Hence the forward earnings estimates are already incorporated in the company’s current share price.
An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management, and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, Shire’s P/CF ratio of 7.5 is lower than the industry average of 11.6, which indicates that the stock is somewhat overvalued in this respect.
Broad Value Outlook
In aggregate, Shire currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Shire a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the P/S ratio for Shire is just 3.3, a level that is far lower than the industry average of 7.6. Clearly, SHPG is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Shire 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 Score of B and a Momentum Score of B. This gives SHPG 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 has seen one estimate go higher in the past sixty days compared to one lower, while the next year estimate has seen one up and none down in the same time period.
As a result, the current year consensus estimate has increased 1 cent in the past two months, while the next year estimate has inched up by 6 cents. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Shire plc Price and Consensus
Despite having a bullish trend, SHPG sports a Zacks Rank #3 (Hold). This indicates that analysts have some apprehensions about the stock in the immediate future. Thus, we are looking for in-line performance from the company in the near term.
Shire is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, a sluggish industry rank (bottom 38% out of more than 250 industries) further strengthens its growth potential. Also, over the past year, the broader industry has clearly underperformed the market at large, as you can see below:
So, value investors might want to wait for broader factors to turn around in this name first, but once that happens, this stock could be a compelling pick.
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