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 McGrath RentCorp (MGRC - 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, McGrath RentCorp has a trailing twelve months PE ratio of 16.97, as you can see in the chart below:
This level actually compares favorably with the market at large, as the PE for the S&P 500 stands at about 17.09. If we focus on the long-term PE trend, McGrath RentCorp’ current PE level puts it below its midpoint of 19.72 over the past five years, with the number having risen rapidly over the past few months. However, the current level stands well below the highs for the stock, suggesting that it can be a solid entry point.
However, the stock’s PE also compares unfavorably with the Zacks Finance Market sector’s trailing twelve months PE ratio, which stands at 12.61. At the very least, this indicates that the stock is relatively overvalued right now, compared to its peers.
We should also point out that McGrath RentCorp has a forward PE ratio (price relative to this year’s earnings) of 16.54, so it is fair to say that a slightly more value-oriented path may be ahead for McGrath RentCorp’s stock in the near term too.
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, McGrath RentCorp’ P/CF ratio of 8.96 is higher than the Zacks Finance industry average of 4.73, which indicates that the stock is somewhat overvalued in this respect.
Broad Value Outlook
In aggregate, McGrath RentCorp currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes McGrath RentCorp a solid choice for value investors.
What About the Stock Overall?
Though McGrath RentCorp 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 Momentum Score of F. This gives MGRC 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 encouraging. The current quarter has seen one upward revision compared
to none downward in the past sixty days, whereas the full year estimate also witnessed one upward revision compared to none downward
revision in the same time period.
As a result, the current quarter consensus estimate increased 2.82% in the past two months, whereas the full year estimate rose 0.9%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
McGrath RentCorp Price and Consensus
Notably, the stock with a long-term EPS growth rate of 10% and favorable estimate trends has a Zacks Rank #2 (Buy), which is why we are looking for outperformance from the company in the near term.
McGrath RentCorp is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Furthermore, the Zacks Rank #2 company flaunts a robust industry rank (among the top 15%), which indicates that the broader factors are favorable for the company.
So, value investors might want to delve deeper in this stock as it appears to be a compelling pick.
Today's Best Stocks from Zacks
Would you like to see the updated picks from our best market-beating strategies? From 2017 through 2018, while the S&P 500 gained +15.8%, five of our screens returned +38.0%, +61.3%, +61.6%, +68.1%, and +98.3%.
This outperformance has not just been a recent phenomenon. From 2000 – 2018, while the S&P averaged +4.8% per year, our top strategies averaged up to +56.2% per year.
See their latest picks free >>