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Is First Horizon (FHN) a Great Stock for Value Investors?

Zacks

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 First Horizon National Corporation FHN 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, First Horizon has a trailing twelve months PE ratio of 18.57, 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 compares in at about 20.24. If we focus on the stock’s long-term PE trend, the current level puts First Horizon’s current PE ratio above its midpoint (which is 15.94) over the past three years.


However, the stock’s PE is slightly unfavorable with the Zacks classified Banks-Southeast industry’s trailing twelve months PE ratio, which stands at 18.29. At the very least, this indicates that the stock is relatively overvalued right now, compared to its peers.

Nonetheless, we should also point out that First Horizon has a forward PE ratio (price relative to this year’s earnings) of just 16.11, so it is fair to say that a slightly more value-oriented path may be ahead for First Horizon stock in the near term too.

P/CF Ratio

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, First Horizon’s P/CF ratio of 14.32 is considerably lower than the Zacks classified Banks-Southeast industry average of 17.75, which indicates that the stock is reasonably undervalued in this respect.

Broad Value Outlook

In aggregate, First Horizon 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 FHN a solid choice for value investors.

What About the Stock Overall?

Though First Horizon 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 ‘D’ and a Momentum score of ‘A’. This gives FHN a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been encouraging. The current quarter has seen three estimates go higher in the past sixty days and one lower, while the full year estimate has seen three upward and three downward revisions in the same time period.

This has had a favorable impact on the consensus estimate, as the current quarter consensus estimate has risen by 3.7% in the past two months, while the full year estimate inched up 0.9%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

The stock holds a Zacks Rank #3 (Hold), which indicates expectations of in-line performance from the company in the near term. However, First Horizon is enjoying bullish analyst sentiment, as indicated by the positive estimate revisions, and this works in the company’s favor.

Bottom Line

First Horizon is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, despite a decent industry rank (top 20% out of more than 250 industries), a Zacks Rank #3, makes it hard to get too excited about this company overall. However, over the past one year, the Zacks Banks-Southeast sector has significantly 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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