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 Ralph Lauren CorporationRL 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, Ralph Lauren has a trailing twelve months PE ratio of 14.16. This level compares pretty favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.59.
If we focus on the long-term trend of the stock the current level puts Ralph Lauren's current PE among its lower zone, well below its median for the term (which stands at 19.32). Hence, we could infer that the stock is undervalued in this respect, especially in light of its historical trend. Thus, the present level seems to be a suitable entry point for the stock from a PE perspective.
Further, the stock's PE also compares favorably with the Zacks classified Textile - Apparel industry's trailing twelve months PE ratio, which stands at 16.68. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers. In fact, since the beginning of 2014, Ralph Lauren has been consistently trading cheaper than the industry in terms of PE.
We should also point out that Ralph Lauren has a forward PE ratio (price relative to this year's earnings) of 14.45, slightly higher than the current figure. Delving deeper into the PE's inputs we observed that the company's earnings have been on a downtrend since fiscal 2014 and the same is expected to continue, at least throughout fiscal 2017. This serves to inflate the Forward PE ratio. The company's fiscal 2017 guidance also reflects this pessimism and the same is not expected to mark turnaround until the first half of fiscal 2018.
Despite meaningful cost saving initiatives, the management believes that margins could decline in the near term. This could be a result of lower sales, driven by continued retail and wholesale closures, decrease in off-price channel sales as well as adverse impact from the divestiture of its Denim & Supply brand. Foreign exchange translation is expected to be a major headwind to the top-line too.
This clearly suggests some level of undervalued trading for RL-at least compared to historical norms.
Broad Value Outlook
In aggregate, Ralph Lauren currently has a Zacks Value Style Score of 'A', putting it into the top 20% of all stocks we cover from this look. This makes Ralph Lauren a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, its P/CF ratio (another great indicator of value) comes in at just 4.96, which is far better than the industry average of 8.53. Clearly, RL is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Ralph Lauren 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 'A' but a Momentum score of 'D'. This gives RL a Zacks VGM score-or its overarching fundamental grade-of 'A'. (You can read more about the Zacks Style Scores here >> )
Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics, and a good VGM score can increase your odds of success. All things considered, Ralph Lauren seems to have pretty striking prospects.
However, the company's recent earnings estimates have been mixed at best. The current quarter has seen one estimate go higher in the past thirty days compared to four lower, while the full year estimate has seen six upward revisions and no downward revisions in the same time period.
This has had a small but meaningful impact on the consensus estimate though as the current quarter consensus estimate has fallen by 5.8% in the past month, while the full year estimate has inched higher by 2.2%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Ralph Lauren Corporation Price and Consensus
The combination of these somewhat mixed factors is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.
Ralph Lauren 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 (Bottom 14% out of more than 250 industries) and a Zacks Rank #3, it is hard to get excited about the company overall.
Notably, the Textile - Apparel industry has widely underperformed the broader market over the last two years, as you can see below:
Despite such broader negative factors, we remain somewhat hopeful about this Zacks Rank #3 company's prospects over the long-run. In Jun 2016, Ralph Lauren announced its Way Forward Plan and the company remains on track to deliver these goals. Divided in two parts, the first part focuses on evolving the company's core business relating to its product, marketing and customer experience. The second part centers around reviving its operating structure by developing a systematic way of building stronger assortments, a demand-driven supply chain, an excellent sourcing capability and a multi-channel global expansion strategy. In short, the plan is all about refocusing on the core, strengthening the brands and returning the company to profitable growth in the long term.
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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