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 Allergan plc (AGN - 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, Allergan has a trailing twelve months PE ratio of 9.1, 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 17.8x. If we focus on the long-term PE trend, Allergan’s current PE level puts it below its midpoint over the past five years, with the number having risen rapidly over the past few months.
Further, the stock’s PE also compares favorably with the broader industry’s trailing twelve months PE ratio, which stands at 8.8. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Allergan has a forward PE ratio (price relative to this year’s earnings) of 9.6, which is tad higher than the current level. So, it is fair to expect an increase in the company’s share price in the near term.
While earnings are certainly important, it is essential to know how much you are paying for the growth of earnings as well. One can easily do that with the PEG ratio (ratio of the P/E to the expected future earnings growth rate). The PEG ratio gives a more complete picture of the valuation of a stock than the P/E ratio.
Allergan’s PEG ratio stands at just 1.2, compared with the Zacks Medical- Genetics industry average of 1.3. This suggests a decent undervalued trading relative to its earnings growth potential right now.
Broad Value Outlook
In aggregate, Allergan currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Allergan a solid choice for value investors.
What About the Stock Overall?
Though Allergan 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 C and a Momentum Score of B. This gives AGN a Zacks VGM score — or its overarching fundamental grade — of B. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been mixed at best. The current quarter has seen six estimates go higher in the past sixty days compared to eight lower, while the full year estimate has seen sixteen up and no down in the same time period.
This has had just a small impact on the consensus estimate though as the current quarter consensus estimate has decreased by 0.5% in the past two months, while the full year estimate has increased by 1.2%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
This somewhat mixed trend is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.
Allergan is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Further, a strong industry rank (among Top 26% of more than 250 industries) instills our confidence.
However, with a Zacks Rank #3 it is hard to get too excited about this company overall. In fact, over the past two years, the broader industry has clearly underperformed the market at large, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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