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Should Value Investors Pick Spirit Realty (SRC) Stock?

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 Spirit Realty Capital, Inc. SRC 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, Spirit Realty has a trailing twelve months PE ratio of 8.60, as you can see in the chart below:

This level is significantly favorable with the market at large, as the PE for the S&P 500 compares in at about 19.97. If we focus on the stock’s long-term PE trend, the current level puts Spirit Realty’s current PE ratio much below its midpoint (which is 13.23) over the past three years.


Further, the stock’s PE also compares favorably with the Zacks classified REIT and Equity Trust – Residential industry’s trailing twelve months PE ratio, which stands at 19.51. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Spirit Realty has a forward PE ratio (price relative to this year’s earnings) of 9.18, so it is fair to expect an increase in the company’s share price in the near future.

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, Spirit Realty’s P/CF ratio of 9.55 is substantially lower than the Zacks classified REIT and Equity Trust – Residential industry average of 18.50, which indicates that the stock is somewhat undervalued in this respect.

Broad Value Outlook

In aggregate, Spirit Realty 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 SRC a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Spirit Realty is just 0.48, a level that is significantly lower than the industry average of 3.17. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, SRC is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Spirit Realty 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 ‘D’. This gives SRC a Zacks VGM score—or its overarching fundamental grade—of ‘D’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been disappointing. The current quarter has seen four estimates go lower in the past sixty days and none higher, while the full year estimate has seen six downward revisions and no upward revisions in the same time period.

This has had a noticeable impact on the consensus estimate, as the current quarter consensus estimate has fallen by 4.5% in the past two months, while the full year estimate has declined 10%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

This bearish trend is why the stock has a Zacks Rank #5 (Strong Sell) and why we fear that the company might disappoint in the near term.

Bottom Line

Spirit Realty is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (bottom 21% out of more than 250 industries) and a Zacks Rank #5, it is hard to get too excited about this company overall. In fact, over the past one year, the Zacks REIT and Equity Trust – Residential sector has clearly underperformed the broader market, as you can see below:

So, value investors might want to wait for estimates, analyst sentiment and broader factors to turn favorable in this name first, but once that happen, this stock could be a compelling pick.

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