Investors interested in Computer - Software stocks are likely familiar with SAP (SAP) and Microsoft (MSFT). But which of these two stocks presents investors with the better value opportunity right now? Let's take a closer look.
The best way to find great value stocks is to pair a strong Zacks Rank with an impressive grade in the Value category of our Style Scores system. The Zacks Rank is a proven strategy that targets companies with positive earnings estimate revision trends, while our Style Scores work to grade companies based on specific traits.
SAP has a Zacks Rank of #2 (Buy), while Microsoft has a Zacks Rank of #3 (Hold) right now. This means that SAP's earnings estimate revision activity has been more impressive, so investors should feel comfortable with its improving analyst outlook. However, value investors will care about much more than just this.
Value investors are also interested in a number of tried-and-true valuation metrics that help show when a company is undervalued at its current share price levels.
The Style Score Value grade factors in a variety of key fundamental metrics, including the popular P/E ratio, P/S ratio, earnings yield, cash flow per share, and a number of other key stats that are commonly used by value investors.
SAP currently has a forward P/E ratio of 16.15, while MSFT has a forward P/E of 23.44. We also note that SAP has a PEG ratio of 0.73. This figure is similar to the commonly-used P/E ratio, with the PEG ratio also factoring in a company's expected earnings growth rate. MSFT currently has a PEG ratio of 2.
Another notable valuation metric for SAP is its P/B ratio of 2.05. The P/B ratio is used to compare a stock's market value with its book value, which is defined as total assets minus total liabilities. For comparison, MSFT has a P/B of 10.59.
These metrics, and several others, help SAP earn a Value grade of B, while MSFT has been given a Value grade of C.
SAP has seen stronger estimate revision activity and sports more attractive valuation metrics than MSFT, so it seems like value investors will conclude that SAP is the superior option right now.
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