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 Rio Tinto plc RIO 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, Rio Tinto has a trailing twelve months PE ratio of 16.75, 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 19.86. If we focus on the long-term PE trend, Rio Tinto’s current PE level puts it above its midpoint and at par with its high over the past five years, with the number having risen rapidly over the past few months.
Further, the stock’s PE also compares favorably with the Zacks classified Basic Materials sector’s trailing twelve months PE ratio, which stands at 24.26. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that Rio Tinto has a forward PE ratio (price relative to this year’s earnings) of just 10.88, so it is fair to say that a slightly more value-oriented path may be ahead for Rio Tinto 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, Rio Tinto has a P/S ratio of about 1.65. This is quite lower than the S&P 500 average, which comes in at 2.97 right now. Also, as we can see in the chart below, this is somewhat below the highs for this stock in particular over the past few years.
If anything, this suggests some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, Rio Tinto 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 Rio Tinto a solid choice for value investors.
What About the Stock Overall?
Though Rio Tinto 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 ‘B’ and a Momentum score of ‘A’. This gives RIO 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 favorable. 2016 has seen two estimates go higher in the past sixty days compared to none lower, while 2017 estimate has seen two up and none down in the same time period.
This has had a significant impact on the consensus estimate though as the 2016 estimate has risen by 15.6% while that of 2017 has risen by 33.7% over the last two months. You can see the consensus estimate trend and recent price action for the stock in the chart below:
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