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 Rio Tinto Group (RIO - 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, Rio Tinto has a trailing twelve months PE ratio of 10.92, 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 compares in at about 20.84. If we focus on the stock’s long-term PE trend, the current level puts Rio Tinto’s current PE ratio slightly below its midpoint (which is 11.46) over the past five years.
Further, the stock’s PE compares favorably with the Zacks Basic Materials sector’s trailing twelve months PE ratio, which stands at 16.51. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Rio Tinto has a forward PE ratio (price relative to this year’s earnings) of just 10.58, so it is fair to say that a slightly more value-oriented path may be ahead for Rio Tinto’s 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, Rio Tinto has a P/S ratio of about 1.74. This is substantially lower than the S&P 500 average, which comes in at 3.62 right now. Also, as we can see in the chart below, this is somewhat 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, Rio Tinto currently has a Value Style Score of A, putting it into the top 20% of all stocks we cover from this look. This makes RIO a solid choice for value investors.
What About the Stock Overall?
Though Rio Tinto 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 grade of D and a Momentum score of A. This gives RIO a 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 year has seen two estimates go higher in the past sixty days and one lower, while the full-year 2021 estimate has seen a similar trend in the same time period.
This has had a favorable impact on the consensus estimate, as the current year consensus estimate has increased 4.8% in the past two months, while the full-year 2021 estimate has inched up 0.2%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
The stock holds a Zacks Rank #3 (Hold), which indicates expectations of in-line performance from the company in the near term. However, Rio Tinto is enjoying somewhat bullish analyst sentiment, as indicated by the positive estimate revisions, and this works in the company’s favor.
Rio Tinto is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Moreover, a strong industry rank (top 37% out of more than 250 industries) further supports the growth potential of the stock. However, with a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past one year, the sector has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for industry trend to turn favorable in this name first, but once that happens, this stock could be a compelling pick.
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