Investors with an interest in Retail - Restaurants stocks have likely encountered both Darden Restaurants (DRI) and Noodles & Co. (NDLS). But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
There are plenty of strategies for discovering value stocks, but we have found that pairing a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system produces the best returns. The Zacks Rank is a proven strategy that targets companies with positive earnings estimate revision trends, while our Style Scores work to grade companies based on specific traits.
Darden Restaurants and Noodles & Co. are sporting Zacks Ranks of #2 (Buy) and #3 (Hold) respectively, right now. This system places an emphasis on companies that have seen positive earnings estimate revisions, so investors should feel comfortable knowing that DRI is likely seeing its earnings outlook improve. But this is only part of the picture for value investors.
Value investors analyze a variety of traditional, tried-and-true metrics to help find companies that they believe are undervalued at their current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
DRI currently has a forward P/E ratio of 18.33, while NDLS has a forward P/E of 288.33. We also note that DRI has a PEG ratio of 1.68. This popular metric is similar to the widely-known P/E ratio, with the difference being that the PEG ratio also takes into account the company's expected earnings growth rate. NDLS currently has a PEG ratio of 32.95.
Another notable valuation metric for DRI is its P/B ratio of 5.08. Investors use the P/B ratio to look at a stock's market value versus its book value, which is defined as total assets minus total liabilities. By comparison, NDLS has a P/B of 10.91.
These are just a few of the metrics contributing to DRI's Value grade of A and NDLS's Value grade of F.
DRI has seen stronger estimate revision activity and sports more attractive valuation metrics than NDLS, so it seems like value investors will conclude that DRI is the superior option right now.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free reportDarden Restaurants, Inc. (DRI): Free Stock Analysis ReportNoodles & Company (NDLS): Free Stock Analysis ReportTo read this article on Zacks.com click here.