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 Federal Signal Corporation (FSS - 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, Federal Signal has a trailing twelve months PE ratio of 14.53, as you can see in the chart below:
This level also compares favorably with the market at large, as the PE for the S&P 500 stands at about 17.09. Meanwhile, if we focus on the long-term PE trend, Federal Signal’s current PE level puts it below its midpoint of 18.32 over the past five years.
The stock’s PE also compares favorably with the Conglomerates Market’s trailing twelve months PE ratio, which stands at 17.53. This indicates that the stock is undervalued right now, compared to its peers.
We should also point out Federal Signal has a forward PE ratio (price relative to this year’s earnings) of 14.93, 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, Federal Signal has a P/S ratio of 1.32. This is lower than the S&P 500 average, which comes in at 2.97 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.
Broad Value Outlook
In aggregate, Federal Signal currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Federal Signal a solid choice for value investors.
What About the Stock Overall?
Though Federal Signal 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 A and a Momentum Score of C. This gives FSS 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. While the current-quarter estimate has seen two upward and no downward movement, the current-year estimate has seen one upward and one downward movement over the past two months.
This has had a mixed effect on the consensus estimate. While the current-quarter consensus has climbed 2.9% over the past two months, the current-year estimate has decreased 1.6%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
This somewhat mixed trend is the reason why the stock has a Zacks Rank #3 (Hold) and why we are looking for inline performance from the company in the near term.
Federal Signal is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Besides a sluggish industry rank (among bottom 15% of more than 250 industries), with a Zacks Rank #3 it 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:
Hence, value investors might want to wait for Zacks Rank, past industry performance, industry rank and analyst sentiments to turn around in the name first, but once that happens, the stock is going to be a compelling pick.
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