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 Foot Locker, Inc. FL 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, Foot Locker has a trailing twelve months PE ratio of 15.23. This level compares pretty favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 19.92.
If we focus on the long-term trend of the stock the current level puts Foot Locker’s current PE near its median zone (which stands at 15.34). Moreover, the current level is fairly below the highs for this stock, suggesting that the stock is undervalued compared to its historical levels.
Delving deeper into the P/E’s inputs we observed that both the stock’s price and its earnings have charted a strong growth trajectory. Thus, the company’s share price performance follows its earnings growth story. These trends can be clearly seen in the chart below:
The future earnings estimation also breeds optimism for the stock. In fact, the forward PE (price relative to this year’s earnings) for the stock stands at 14.78, further justifying that a slightly more value-oriented path may be ahead for the company in the near term.
Currently, the stock’s PE does not compare favorably with the Zacks classified Retail - Apparel and Shoes industry’s trailing twelve months PE ratio, which stands at 14.92. At the very least, this indicates that the stock is relatively overvalued right now, compared to its peers. However, the long-term trend shows that most of the times the industry was overvalued compared to Foot Locker. If we were to follow past trends, it would seem wise to wait for a better entry point to materialize, which is likely imminent.
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, Foot Locker has a P/S ratio of about 1.23. This is higher than the Zacks categorized Retail - Apparel and Shoes industry average, which comes in at 0.67 right now, and has been consistently higher than the industry since 2015.
However, looking at the broader market, Foot Locker’s P/S compares much favorably with the S&P 500 average, which comes in at 2.98 right now.
Also, the current level is well among the highs for this stock in particular over the past few years. This suggests that the company’s stock price has already appreciated to some degree, relative to its sales.
Broad Value Outlook
In aggregate, Foot Locker currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This makes Foot Locker a solid choice for value investors.
What About the Stock Overall?
Though Foot Locker 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 ‘B’. This gives FL 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 mixed at best. The current quarter has seen one estimate go higher in the past sixty days compared to six lower, while the full year estimate has seen eight upward revisions and one downward in the same time period.
This has had just a small impact on the consensus estimate though as the current quarter consensus estimate has declined 0.8% in the past two months, while the full year estimate has inched higher by 0.2%. You can see the consensus estimate trend and recent price action for the stock in the chart below:
Foot Locker, Inc. Price and Consensus
Foot Locker, Inc. Price and Consensus | Foot Locker, Inc. Quote
These mixed expectations indicate that while the stock’s growth story might be good over the long term, analysts have some apprehensions about the stock in the immediate future. Thus, we are looking for in-line performance from this Zacks Rank #3 (Hold) company in the near term.
Foot Locker 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 17% out of more than 250 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall.
The company operates in the highly competitive athletic footwear and apparel segment. It faces stiff competition from athletic footwear specialty stores, sporting goods stores, department stores, discount stores and traditional shoe stores in terms of distinctiveness, innovativeness, quality and pricing, which may weigh on its results. Moreover, the industry remains susceptible to macroeconomic factors that put pressure on consumer discretionary spending.
Notably, the industry has significantly underperformed the broader market over the last two years, as you can see below:
Despite such negative broader factors, the fact remains that Foot Locker has been achieving phenomenal earnings growth and its price performance is likely to keep reflecting the same. This indicates that the company remains a strong value proposition.
So, value investors might want to wait for analyst sentiment to turn bullish in this name and the price to correct downwards a little first, but once that happens, this stock would be a compelling pick.
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