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Is Summit Hotel (INN) 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 Summit Hotel Properties, Inc. INN 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, Summit Hotel has a trailing twelve months PE ratio of 11.27, 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 21.72. If we focus on the long-term PE trend, Summit Hotel’s current PE level stands almost in line with its midpoint over the past five years. Notably, the current level stands below the highs for the stock, indicating some scope for entry still.



Further, the stock’s PE compares favorably with the Zacks Finance sector’s trailing twelve months PE ratio, which stands at 17.00. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.



We should also point out that Summit Hotel has a forward PE ratio (price relative to this year’s earnings) of 10.42, so it is fair to say that a slightly more value-oriented path may be ahead for Summit Hotel 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, Summit Hotel’s P/CF ratio of 8.51 is lower than the Zacks REIT-Equity-Trust industry average of 14.81, which indicates that the stock is quite undervalued in this respect.



Broad Value Outlook

In aggregate, Summit Hotel currently has a Value Score of B, putting it into the top 40% of all stocks we cover from this look. This makes Summit Hotel a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the P/CF ratio (another great indicator of value) for Summit Hotel is just 7.25, a level that is far lower than the industry average of 12.95. Clearly, INN is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Summit Hotel 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 Score of D and a Momentum Score of A. This gives INN a Zacks VGM score — or its overarching fundamental grade — of B. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the full year estimate has seen one upward and downward revision each in the past thirty days, while the current quarter has not seen any estimate revisions in the same time period. This did not have any impact on the consensus estimate though as both, the current quarter and full year consensus estimates have remained unchanged over the past month. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Summit Hotel Properties, Inc. Price and Consensus

Summit Hotel Properties, Inc. Price and Consensus | Summit Hotel Properties, Inc. Quote


Given these trends, the stock has just a Zacks Rank #3 (Hold), which is why we are looking for in-line performance from the company in the near term.

Bottom Line

Summit Hotel 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 Zacks Industry Rank (among Bottom 26% of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past two years, the 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 improve in this name first, but once that happens, this stock could be a compelling pick.

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