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 Tokyo Electron Limited (TOELY - 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, Tokyo Electron has a trailing twelve months PE ratio of 10.74, 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 18.24. If we focus on the long-term PE trend, Tokyo Electron’s current PE level puts it below its midpoint of 17.67, suggesting that the stock is undervalued compared to its historical levels.
Further, the stock’s PE also compares pretty favorably with the Zacks Computer and Technology sector’s trailing twelve months PE ratio, which stands at 20.41. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Tokyo Electron has a forward PE ratio (price relative to this year’s earnings) of 15.23, which is higher than the current level. So, it is fair to expect an increase in the company’s share price in the near term.
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, Tokyo Electron has a P/S ratio of about 2.15. This is lower than the S&P 500 average, which comes in at 3.32 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.
If anything, TOELY is in the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, Tokyo Electron currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Tokyo Electron a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for Tokyo Electron is just 1.02, a level that is marginally lower than the industry average of 1.03. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate.
What About the Stock Overall?
Though Tokyo Electron 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 A and a Momentum Score of B. This gives TOELY 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 consensus estimate has risen 13.6% in the past two months, while the next year estimate has increased 5.3%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Tokyo Electron Ltd. Price and Consensus
Even though Tokyo Electron has a stable estimates trend, the stock has just a Zacks Rank #3 (Hold), which is why we are looking for in-line performance from the company in the near term.
Tokyo Electron is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Although the stock has a strong industry rank (among Top 27% of more than 250 industries), with a Zacks Rank #3 it is hard to get too excited about the stock.
However, over the past two years, the Semiconductor-Discrete industry has clearly outperformed the overall market, as you can see below:
So, despite a Zacks Rank #3, we believe that bullish analyst sentiment and favorable industry factors make this value stock a compelling pick.
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