Investors interested in stocks from the Automotive - Original Equipment sector have probably already heard of Magna (MGA - Free Report) and Spartan Motors (SPAR - Free Report) . But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
There are plenty of strategies for discovering value stocks, but we have found that pairing a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system produces the best returns. The Zacks Rank is a proven strategy that targets companies with positive earnings estimate revision trends, while our Style Scores work to grade companies based on specific traits.
Currently, Magna has a Zacks Rank of #2 (Buy), while Spartan Motors has a Zacks Rank of #3 (Hold). This means that MGA's earnings estimate revision activity has been more impressive, so investors should feel comfortable with its improving analyst outlook. But this is just one factor that value investors are interested in.
Value investors are also interested in a number of tried-and-true valuation metrics that help show when a company is undervalued at its current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
MGA currently has a forward P/E ratio of 8.50, while SPAR has a forward P/E of 23.78. We also note that MGA has a PEG ratio of 1. This popular metric is similar to the widely-known P/E ratio, with the difference being that the PEG ratio also takes into account the company's expected earnings growth rate. SPAR currently has a PEG ratio of 1.59.
Another notable valuation metric for MGA is its P/B ratio of 1.74. The P/B ratio pits a stock's market value against its book value, which is defined as total assets minus total liabilities. For comparison, SPAR has a P/B of 3.05.
These metrics, and several others, help MGA earn a Value grade of A, while SPAR has been given a Value grade of D.
MGA has seen stronger estimate revision activity and sports more attractive valuation metrics than SPAR, so it seems like value investors will conclude that MGA is the superior option right now.