- 26 марта 2018, 17:05
- Zacks Investment Research
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 Cummins Inc. CMI 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, Cummins has a trailing twelve months PE ratio of 14.6, 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 19.9. If we focus on the long-term PE trend, Cummins’ current PE level puts it below its midpoint of 16.3 over the past five years. Moreover, the current level stands well below the highs for the stock, suggesting that it could be a great entry point.
However, the stock’s PE stands above the Zacks Auto – Tires – Trucks sector’s trailing twelve months PE ratio of 10.4. This indicates that the stock is relatively stretched right now, compared to its peers.
Nonetheless, we should also point out that Cummins has a forward PE ratio (price relative to this year’s earnings) of just 12.3, so it is fair to say that a slightly more value-oriented path may be ahead for Cummins 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, Cummins has a P/S ratio of about 1.3. This is significantly lower than the S&P 500 average, which comes in at 3.2 right now.
Broad Value Outlook
In aggregate, Cummins currently has a Value Score of A, putting it into the top 20% of all stocks we cover from this look. This makes Cummins a solid choice for value investors.
What About the Stock Overall?
Though Cummins 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 CMI 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 quite encouraging. The current quarter has seen seven estimates go higher in the past sixty days compared to one downward revision, while the full year estimate has seen ten upward and one downward revision in the same time period.
This has had a meaningful impact on the consensus estimate as the current quarter consensus estimate has risen by nearly 7% in the past two months, while the full year estimate has jumped 6.4%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
However, this bullish trend has likely not yet been reflected in the stock, as we have just a Zacks Rank #3 (Hold), which indicates expectations of in-line performance in the near term. Nevertheless, the bullish analyst sentiment indicates that the stock’s prospects in the near term look good.
Cummins is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Despite having a Zacks Rank #3, the stock belongs to an industry which is ranked among the Top 48% of more than 250 industries, which indicates that broader factors are favorable for the company. In fact, over the past two years, the industry has clearly outperformed the broader market, as you can see below:
So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.
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