Should Value Investors Consider Fibria Celulose (FBR) Stock?
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 Fibria Celulose S.A.FBR 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, Fibria Celulose has a trailing twelve months PE ratio of 9.14. This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 19.72.
If we focus on the stock's long-term PE trend, Fibria Celulose has seen huge bouts of volatility. Most of the stock's earnings till mid-2014 were actually in the negative or close to break-even territory, putting the PE multiple also at a negative figure most of the times. Post 2014, the stock has seen consistent periods of high PE multiples so much so that it went till about 1,477x in 2015! Since beginning of 2016, the stock's PE has remained somewhat stable in the positive territory. Currently, the stock is trading among the lows of its positive territory days. However, due to huge volatility in its earnings in the past, we are not sure if the current spot makes for a good entry point.
Further, the stock's PE compares favorably with the Zacks categorized Paper & Paper Products industry's trailing twelve months PE ratio, which stands at 13.71. This indicates that the stock is significantly undervalued right now, compared to its peers. However, looking at the chart below, we can also figure out that the industry's trend has remained pretty stable in comparison to the stock's. Thus, solely comparing with the current PE values might not be entirely reasonable.
We should also point out that Fibria Celulose has a forward PE ratio (price relative to this year's earnings) of just 6.95. However, empirical research has suggested that most of the companies have a Forward PE ratio lower than the trailing PE multiple as analysts tend to be overly optimistic about future earnings. A bloated earnings estimate figure pulls down the Forward PE value drastically.
In the case of Fibria Celulose, we are not sure what path the earnings might take. Earnings for the current year are projected to be $1.38 (an over 140% increase year over year); but the company is expected to post a loss of 29 cents in the next year (a 121% decrease on year over year basis). Moreover, sales for the current year and next year are both expected to decline are both expected to decline on year over year basis.
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, Fibria Celulose has a P/S ratio of about 1.86. This is much higher than the industry average, which comes in at 0.82 right now. This signifies that the stock is much more overvalued in terms of its PS ratio, as compared to its immediate peers.
In comparison to its own trend, the stock seems to be in the medium zone (as its median stands at about 1.88). This does not provide us with a conclusive direction as to enter or not to enter.
Broad Value Outlook
In aggregate, Fibria Celulose currently has a Zacks Value Style Score of 'A', putting it into the top 20% of all stocks we cover from this look. This is because some of its other key metrics are favorable.
For example, its P/CF ratio (another great indicator of value) comes in at 4.11, which is far better than the industry average of 7.01. Additionally, it's P/B (used to compare a stock's market value to its book value) stands at 1.21, lower than the industry average of 1.57.
What About the Stock Overall?
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 'C' and a Momentum score of 'F'. This gives FBR 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 mixed at best. While the current quarter remains constant in the past thirty days, the full year estimate has seen no upward and one downward revision in the same time period.
This has had a considerable impact on the consensus estimate as the full year estimate has declined by 8% in the past month. You can see the consensus estimate trend and recent price action for the stock in the chart below:
FIBRIA CELULOSE Price and Consensus
This somewhat mixed trend 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.
With a sluggish industry rank (Bottom 11% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall.
The pulp and paper industry is highly cyclical. Fluctuations in the prices and the demand for the company's pulp and paper products could result in lower sales volumes and smaller profit margins. Long-term trends indicate some weakness in North American paper demand, which could hamper the company's top line.
In fact, over the past two years, the Zacks categorized Paper & Paper Products industry has clearly underperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around as well as the company's earnings to stabilize, before investing in this name.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.