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 Discovery (DISCA - 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, Discovery has a trailing twelve months PE ratio of 11.6, 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 17.5. If we focus on the long-term PE trend, Discovery’s current PE level puts it below its midpoint of 13.1 over the past five years. Moreover, the current level stands well below the highs for the stock, suggesting that it can be a solid entry point.
Further, the stock’s PE also compares favorably with the Zacks Consumer Discretionary sector’s trailing twelve months PE ratio, which stands at 21.7. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Discovery has a forward PE ratio (price relative to this year’s earnings) of just 7.9, so it is fair to say that a slightly more value-oriented path may be ahead for Discovery 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, Discovery has a P/S ratio of about 1.9. This is lower than the S&P 500 average, which comes in at 3.2 right now. Also, as we can see in the chart below, this is well below the highs for this stock in particular over the past few years.
Broad Value Outlook
In aggregate, Discovery currently has a Value Score of A, putting it into the top 20% of all stocks we cover from this look. This makes Discovery a solid choice for value investors.
For example, the PEG ratio for Discovery is just 0.3, a level that is far lower than the industry average of 1.2. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Additionally, its P/CF ratio (another great indicator of value) comes in at 2.4, which is lower than the industry average of 5.2. Clearly, DISCA is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Discovery 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 and Momentum Score of A each. This gives DISCA 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 quarter has seen one estimate go higher in the past sixty days compared to no downward revisions, while the full year estimate has seen two upward and three downward revisions in the same time period.
As a result, the current quarter consensus estimate has risen by 31.7% in the past two months, while the full year estimate has increased 4.9%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Discovery, Inc. Price and Consensus
Discovery is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Furthermore, a robust industry rank (among the top 32% out of more than 250 Zacks Industries) should boost investor confidence.
However, over the past two years, 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 Discovery.
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