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 Lithia Motors, Inc. LAD 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, Lithia Motors has a trailing twelve months PE ratio of 17.03, 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 24.94. If we focus on the long-term PE trend, Lithia Motors’ current PE level puts it above its midpoint over the past five years.
Further, the stock’s PE also compares favorably with the sector’s trailing twelve months PE ratio, which stands at 39.71. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Lithia Motors has a forward PE ratio (price relative to this year’s earnings) of just 14.99, so it is fair to say that a slightly more value-oriented path may be ahead for Lithia Motors 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, Lithia Motors has a P/S ratio of about 0.49. This is significantly lower than the S&P 500 average, which comes in at 5.03 right now. Also, as we can see in the chart below, this is below the highs for this stock in particular over the past few years.
LAD is actually in the higher zone of its trading range in the time period per the P/S metric, which suggests that the company’s stock price has already appreciated to some degree, relative to its sales.
Broad Value Outlook
In aggregate, Lithia Motors 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 Lithia Motors a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the PEG ratio for Lithia Motors is 0.68, a level that is lower than the industry average of 1.12. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, LAD is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though Lithia Motors 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 and a Momentum score of C. This gives LAD 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 mostly trending higher. The current quarter has seen two estimates go higher in the past sixty days compared to one lower, while the full year estimate has seen four upward and zero downward revisions in the same time period.
As a result, the current quarter consensus estimate has risen by 18% in the past two months, while the full year estimate has increased 25%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Lithia Motors, Inc. Price and Consensus
Lithia Motors, Inc. price-consensus-chart | Lithia Motors, Inc. Quote
Even though Lithia Motors has a better estimates trend, the stock has just a Zacks Rank #3 (Hold). That is why we are looking for in-line performance from the company in the near term.
Lithia Motors is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. With a solid industry rank (among the Top 3%), the company looks like a strong value contender. In fact, over the past two years, the industry has clearly outperformed the broader market, as you can see below:
So, despite a Zacks Rank #3, we believe that bullish analyst sentiment and favorable industry factors make this value stock a compelling pick.
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