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 A. O. Smith Corporation AOS 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, A. O. Smith has a trailing twelve months PE ratio of 18.36, 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 stands at about 20.05. If we focus on the long-term PE trend, A. O. Smith’s current PE level puts it below its midpoint (which is 25.68) over the past five years. Moreover, the current level stands well below the highs for the stock, suggesting that it can be a solid entry point.
Further, the stock’s PE also compares favorably with the Zacks Industrial Products sector’s trailing twelve months PE ratio, which stands at 17.77. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that A. O. Smith has a forward PE ratio (price relative to this year’s earnings) of just 17.58, so it is fair to say that a slightly more value-oriented path may be ahead for A. O. Smith 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, A. O. Smith has a P/S ratio of about 2.25. This is a bit lower than the S&P 500 average, which comes in at 3.48x 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, A. O. Smith currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes A. O. Smith a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for A. O. Smith is just 1.76, a level that is far lower than the industry average of 2.02. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, AOS is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though A. O. Smith 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 D. This gives AOS 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 dismal at best. The current quarter has seen no estimate go higher in the past sixty days compared to two lower, while the full year estimate has seen one up and eight down in the same time period.
This has had a noticeable impact on the consensus estimate though as the current quarter consensus estimate has declined by 9.1% in the past two months, while the full year estimate fell by 3.6%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
A. O. Smith Corporation Price and Consensus
Despite the sluggish trend, the stock has a Zacks Rank #3 (Hold) which is why we are looking for in-line performance from the company in the near term.
A. O. Smith is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (among Bottom 41% of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the Zacks Manufacturing - Electronics industry has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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