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 Royal Bank of Canada (RY - 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, Royal Bank of Canada has a trailing twelve months PE ratio of 8.95, 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 18.46. If we focus on the long-term PE trend, Royal Bank of Canada’s current PE level puts it below its midpoint over the past five years. Moreover, the current level is fairly below the highs for this stock, suggesting it might be a good entry point.
Further, the stock’s PE also compares favorably with the sector’s trailing twelve months PE ratio, which stands at 11.32. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
However, we should point out that Royal Bank of Canada has a forward PE ratio (price relative to this year’s earnings) of 10.89, so we might say that the forward earnings estimates indicate that the company’s share price will likely appreciate in the near future.
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, Royal Bank of Canada has a P/S ratio of about 1.71. This is lower than the S&P 500 average, which comes in at 3.10 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, RY is in the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, Royal Bank of Canada currently has a Zacks Value Style Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Royal Bank of Canada a solid choice for value investors.
What About the Stock Overall?
Though Royal Bank of Canada 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 B and a Momentum score of D. This gives RY a Zacks VGM score—or its overarching fundamental grade—of C. (You can read more about the Zacks Style Scores here >>)
Meanwhile, the company’s recent earnings estimates have been trending lower. The current fiscal quarter has seen zero estimates go higher in the past sixty days compared to four lower, while the fiscal full year estimate has seen zero upward and five downward revisions in the same time period.
As a result, the current fiscal quarter consensus estimate has fallen by 33.1% in the past two months, while the fiscal full year estimate has declined 21.5%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
This negative trend is why the stock has a Zacks Rank #4 (Sell) despite strong value metrics and why we fear that the company might disappoint in the near term.
Royal Bank of Canada 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 the bottom 33%) and a Zacks Rank #4, it is hard to get excited about this company overall. In fact, over the past two years, the industry has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates, analyst sentiment and broader factors to turn around in this name first, but once that happens, this stock could be a compelling pick.
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