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 First American Financial Corporation (FAF - 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, First American Financial has a trailing twelve months PE ratio of 11.37, 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 17.77. If we focus on the long-term PE trend First American Financial’s current PE level puts it below its midpoint over the past five years.
Further, the stock’s PE also compares pretty favorably with the Zacks - Finance sector’s trailing twelve months PE ratio, which stands at 14.25. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that First American Financial has a forward PE ratio (price relative to this year’s earnings) of just 11.14, so it is fair to say that a slightly more value-oriented path may be ahead for the 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, First American Financial has a P/S ratio of about 1.04. This is lower than the S&P 500 average, which comes in at 3.21x 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, this suggests some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, First American Financial currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes the stock a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, its P/CF ratio comes in at 8.78, which is better than the industry average of 14.45. Clearly, the stock is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though FAF 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 D and a Momentum Score of B. This gives FAF 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 upbeat. The current quarter has seen one upward revision with one downward movement in the past sixty days. For the full year, the estimate has seen two upward revisions in the same time period with no movement in the opposite direction.
This has had an impact on the consensus estimate as the current quarter consensus estimate has inched up 0.75% in the past two months, while the full year estimate increased 2.4%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
First American Financial Corporation Price and Consensus
This positive trend signifies bullish analyst sentiment, and its Zacks Rank #2 (Buy) indicates robust fundamentals and expectations of outperformance in the near term.
First American Financial 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 18% of more than 250 industries) and Zacks Rank #2 boosts our confidence.
However, over the past two years, the Zacks Insurance - Property and Casualty industry has clearly underperformed the market at large, as you can see below:
We believe, despite an unsatisfactory past industry performance, a good industry and Zacks rank signal that the stock is likely to benefit from favorable broader factors in the immediate future. Add to this robust value metrics, and we believe that we have a strong value contender in First American Financial.
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