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 EQT Midstream Partners, L.P. EQM 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, EQT Midstream has a trailing twelve months PE ratio of 14.87. This level compares pretty favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.24.
If we focus on the long-term trend of the stock the current level puts EQT Midstream’s current PE among its lows over the observed period. This suggests that the stock is undervalued compared to its own historical levels and thus it could be a suitable entry point.
Further, the stock’s PE also compares significantly favorably with the Zacks classified Oil and Gas – Production and Pipelines industry’s trailing twelve months PE ratio, which stands at 30.96. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that EQT Midstream has a forward PE ratio (price relative to this year’s earnings) of 13.68 – which is lower than the current figure. So it is fair to say that a slightly more value-oriented path may be ahead for EQT Midstream 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, EQT Midstream has a P/S ratio of about 8.47. This is much higher than the Zacks categorized Oil and Gas – Production and Pipelines industry average, which comes in at 2.85 right now.
If anything, EQM is towards the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.
An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.
The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.
In this case, EQT Midstream’s P/CF ratio of 10.37 is much lower than the Zacks classified Oil and Gas – Production and Pipelines industry average of 17.95, which indicates that the stock is undervalued in this respect.
While earnings are certainly important, it is essential to know how much you are paying for the growth of earnings as well. One can easily do that with the PEG ratio (ratio of the P/E to the expected future earnings growth rate).The PEG ratio gives a more complete picture of the valuation of a stock than the P/E ratio.
EQT Midstream’s PEG ratio stands at just 1.25, compared with the Zacks Oil and Gas – Production and Pipelines industry average of 2.88. This suggests a decent undervalued trading relative to its earnings growth potential right now.
Broad Value Outlook
In aggregate, EQT Midstream 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 EQT Midstream a solid choice for value investors, and some of its other key metrics make this pretty clear too.
For example, the EV/EBITDA for EQT Midstream is just 11.38, a level that is far lower than the industry average of 14.10. The EV/EBITDA multiple (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) is capital structure-neutral, as it takes into account the level of debt on a company’s balance sheet, not just its equity. Since the oil and gas companies have a large amount of debt on their balance sheets, it makes sense to compare based on this ratio too.
Clearly, EQM is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though EQT Midstream 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 ‘C’ and a Momentum score of ‘F’. This gives EQM 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. The current quarter has seen no estimates go higher in the past sixty days compared to one lower, while the full year estimate has seen two upward revisions and one downward revision in the same time period.
This has had just a small impact on the consensus estimate though as the current quarter consensus estimate has declined 1.4% over the past two months, while the full year estimate has inched higher by 0.5%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
EQT Midstream Partners, LP Price and Consensus
This mixed trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.
EQT Midstream is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a somewhat sluggish industry rank (Bottom 43% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. Notably, the Oil and Gas – Production and Pipelines industry has clearly underperformed the broader market over the last two years, as you can see below:
Nevertheless, despite some uncertainties in the near term, we believe that strong metrics make this stock a compelling value pick over the long horizon.
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