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Is Heineken (HEINY) the Right Choice for Value Investors?


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 Heineken N.V. HEINY 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:

PE Ratio

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, Heineken has a trailing twelve months PE ratio of 20.39. This level stands higher than the market at large, as the PE ratio for the S&P 500 comes in at about 19.92. Through the chart below, we can determine that Heineken has always traded at a PE multiple above that of the market, over the observed period.

In fact, if we focus on the long-term trend of the stock, this level puts Heineken’s current PE below its median for the term (which stands at 22.19), and the number has been falling considerably since mid-2016.

However, currently, the stock’s PE compares quite favorably with the Zacks classified Beverages – Alcohol industry’s trailing twelve months PE ratio, which stands at 30.05. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Heineken has a forward PE ratio (price relative to this year’s earnings) of just 17.36, which is lower than the current level. However, empirical research has suggested that for most companies, the forward PE ratio is lower than the trailing PE multiple. This is because analysts tend to be overly optimistic about future earnings, and an inflated earnings estimate figure thus pulls down the forward PE value drastically.

PS Ratio

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, Heineken has a P/S ratio of about 1.89. This is radically lower than the Zacks categorized Beverages – Alcohol industry average, which comes in at 20.14 right now. The current level falls near the median zone for the stock (which stands at 1.75) in its recent history.

However, merely comparing on the basis of these numbers does not provide a complete picture. Further analysis showed that though Heineken boasts of revenues stronger than the industry, margins earned on them is much lower than what its peers earn. This translates to a much lower earnings per share figure. The following two graphs show the Gross Margin and Net Margin achieved by Heineken, in comparison to the Beverages – Alcohol industry average.

Thus, unless the company puts in effective cost control procedures or improves its pricing leverage, it will not make for a true value investment even though its valuation metrics are lower than the industry’s average presently.

Broad Value Outlook

In aggregate, Heineken currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This is because some of its other key metrics are favorable in absolute terms.

For example, its P/CF ratio (a great indicator of the financial health of the company) comes in at 11.11, which is far better than the industry average of 17.15. However, the PEG ratio for Heineken is 2.89, slightly higher than the industry average of 2.39. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate.

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 ‘B’ and a Momentum score of ‘C’. This gives HEINY a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)

Even though these statistics have been favorable, the company’s recent earnings estimates have been trending slightly downwards. Over the past two months, the current year estimate has moved down by 2.4% while the next year estimate moved down by 1.4%.

You can see the recent price action for the stock in the chart below:

Heineken NV Price

These somewhat mixed factors are 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.

Bottom Line

With a sluggish industry rank (Bottom 31% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall.

The alcohol industry is highly susceptible to macroeconomic factors such as credit availability, unemployment levels, and high household debt levels, which could negatively impact consumer discretionary spending. Moreover, several governmental restrictions put on alcohol consumption in any country impacts the industry’s top-line vastly.

In fact, over the past three years, the Zacks categorized Beverages – Alcohol 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 in this name first as well as the company’s earnings to stabilize, and once that happens, this stock could be a compelling pick.

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