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, CDK Global ,Inc. CDK 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, CDK Global has a trailing twelve months PE ratio of 10.08, 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 14.98. If we focus on the stock’s long-term PE trend, the current level CDK Global puts current PE ratio below its midpoint (which is 26.0) over the past five years.
Also, the stock’s PE compares favorably with the Zacks IT Services market’s trailing twelve months PE ratio, which stands at 14.11. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.
We should also point out that CDK Global has a forward PE ratio (price relative to this year’s earnings) of 9.13, so it is fair to say that a slightly more value-oriented path may be ahead for the 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, the stock has a P/S ratio of about 1.99. This is substantially lower than the S&P 500 average, which comes in at 2.60 right now. Also, as we can see in the chart below, this is slightly below the highs for this stock in particular over the past few years.
If anything, this suggests some level of undervalued trading—at least compared to historical norms.
Broad Value Outlook
In aggregate, CDK Global currently has a Value Style Score of B, putting it into the top 40% of all stocks we cover from this look. This makes CDK a solid choice for value investors and some of its other metrics make it clear too.
For example, the PEG ratio for CDK Global is just 0.83, a level that is slightly lower than the industry average of 1.28. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Additionally, its P/CF ratio (another great indicator of value) comes in at 7.76, which is noticeably better than the industry average of 9.03. Clearly, CDK is a solid choice on the value front from multiple angles.
What About the Stock Overall?
Though CDK Global 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 C. This gives CDK a 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 disappointing. The current year has seen three estimates go lower in the past sixty days and none higher, while full-year 2020 estimate has seen two downward and one upward revision in the same time period.
This has had a noticeable impact on the consensus estimate. The current year consensus estimate has declined 5.4% in the past two months, while the full-year 2020 estimate has dipped 0.3% in the same time period. You can see the consensus estimate trend and recent price action for the stock in the chart below:
CDK Global, Inc. Price and Consensus
CDK Global, Inc. price-consensus-chart | CDK Global, Inc. Quote
Despite this negative trend, the stock has a Zacks Rank #2 (Buy) on the back of its strong value metrics and this is why we are expecting above-average performance from the company in the near-term.
CDK Global is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. With a formidable industry rank (among the Top 37%) and strong Zacks Rank, CDK Global looks like a strong value contender. In fact, over the past one year, the sector has clearly outperformed the broader market, as you can see below:
So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.
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