Should Value Investors Consider Ruth's Hospitality Stock?

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 Ruth's Hospitality Group, Inc. RUTH 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, Ruth's Hospitality has a trailing twelve months PE ratio of 19.32, 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 20.33. If we focus on the long-term PE trend, Ruth's Hospitality’s current PE level puts it above its midpoint over the past five years.

Further, the stock’s PE also compares favorably with the Zacks classified Retail-Wholesale: Retail - Restaurants industry’s trailing twelve months PE ratio, which stands at 23.69. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Ruth's Hospitality has a forward PE ratio (price relative to this year’s earnings) of just 17.10, so it is fair to say that a slightly more value-oriented path may be ahead for Ruth's Hospitality stock in the near term too.

P/S 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, Ruth's Hospitality has a P/S ratio of about 1.46. This is lower than the S&P 500 average, which comes in at 3.08 right now. Also, as we can see in the chart below, this is below the highs for this stock in particular over the past few years.

As we can see, the stock is trading around its median value for the time period from a P/S metric. This does not provide us with a conclusive direction as to the relative valuation of the stock in comparison to its historical trend.

Broad Value Outlook

In aggregate, Ruth's Hospitality 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 Ruth's Hospitality a solid choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Ruth's Hospitality is 1.20, a level that is lower than the industry average of 1.64. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, RUTH is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Ruth's Hospitality 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 ‘B’ and a Momentum score of ‘B’. This gives RUTH a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (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 four lower, while the full year estimate has seen two upward and one downward revision in the same time period.

This has had some impact on the consensus estimate as the current quarter consensus estimate has fallen by 5.7% in the past two months, while the full year estimate has increased by nearly 1%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
 

Ruth's Hospitality Group, Inc. Price and Consensus
 

Ruth's Hospitality Group, Inc. Price and Consensus | Ruth's Hospitality Group, Inc. Quote

This somewhat mixed trend is 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

Ruth's Hospitality 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 (among the bottom 34%) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past one year, the Zacks Retail-Wholesale: Retail - Restaurants industry 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 around in this name first, but once that happens, this stock could be a compelling pick.

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