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 Encompass Health Corporation (EHC - 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, Encompass Health has a trailing twelve months PE ratio of just 16.19, 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 17.78. Also, if we focus on the long-term PE trend, Encompass Health’s current PE level puts it below its midpoint of 17.57 over the past five years.
The stock’s PE compares quite favorably with the Medical Market’s trailing twelve months PE ratio, which stands at 20.51. This indicates that the stock is undervalued right now, compared to its peers.
Meanwhile, Encompass Health has a forward PE ratio (price relative to this year’s earnings) of 16.21, which is slightly higher than the current level. So, it is fair to expect an increase in 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, Encompass Health has a P/S ratio of just 1.39. This is quite lower than the S&P 500 average, which comes in at 3.14x 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, Encompass Health currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Encompass Health a solid choice for value investors and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for Encompass Health is 2.04, a level that is lower than the industry average of 2.24. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate.
What About the Stock Overall?
Though Encompass Health 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 B and a Momentum Score of C. This gives EHC 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 mixed at best. The current quarter has seen four estimates go down in the past sixty days compared to no upward revisions, while the full year estimate has seen two down and five up in the same time period.
This has had a mixed effect on the consensus estimate. While the current-quarter consensus estimate has dipped 2.2% over the past two months, the current-year estimate has inched up 0.5%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Such mixed analyst sentiments is the reason why the stock has a Zacks Rank #3 (Hold) and why we are looking for in line performance from the company in the near term.
Encompass Health is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Despite a strong industry rank (among Top 13% of more than 250 industries), with a Zacks Rank #3 is hard to get too excited about the stock.
Also, over the past two years, the broader industry has clearly underperformed the market at large, as you can see below:
So, value investors might want to wait for the Zacks Rank and past industry performance to turn around in this name first, but once that happens, this stock could be a compelling pick.
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