Investors interested in stocks from the Retail - Restaurants sector have probably already heard of Red Robin (RRGB - Free Report) and Noodles & Co. (NDLS - Free Report) . But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
The best way to find great value stocks is to pair a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system. The Zacks Rank is a proven strategy that targets companies with positive earnings estimate revision trends, while our Style Scores work to grade companies based on specific traits.
Right now, Red Robin is sporting a Zacks Rank of #1 (Strong Buy), while Noodles & Co. has a Zacks Rank of #2 (Buy). This means that RRGB's earnings estimate revision activity has been more impressive, so investors should feel comfortable with its improving analyst outlook. But this is just one factor that value investors are interested in.
Value investors are also interested in a number of tried-and-true valuation metrics that help show when a company is undervalued at its current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
RRGB currently has a forward P/E ratio of 26.25, while NDLS has a forward P/E of 46.22. We also note that RRGB has a PEG ratio of 2.72. This figure is similar to the commonly-used P/E ratio, with the PEG ratio also factoring in a company's expected earnings growth rate. NDLS currently has a PEG ratio of 5.28.
Another notable valuation metric for RRGB is its P/B ratio of 1.16. The P/B is a method of comparing a stock's market value to its book value, which is defined as total assets minus total liabilities. By comparison, NDLS has a P/B of 7.27.
These metrics, and several others, help RRGB earn a Value grade of B, while NDLS has been given a Value grade of D.
RRGB is currently sporting an improving earnings outlook, which makes it stick out in our Zacks Rank model. And, based on the above valuation metrics, we feel that RRGB is likely the superior value option right now.