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Should Value Investors Buy First American Financial (FAF) Stock?

Zacks Equity Research
Southwest (LUV) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

Here at Zacks, we focus on our proven ranking system, which places an emphasis on earnings estimates and estimate revisions, to find winning stocks. But we also understand that investors develop their own strategies, so we are constantly looking at the latest trends in value, growth, and momentum to find strong companies for our readers.

Of these, perhaps no stock market trend is more popular than value investing, which is a strategy that has proven to be successful in all sorts of market environments. Value investors rely on traditional forms of analysis on key valuation metrics to find stocks that they believe are undervalued, leaving room for profits.

Luckily, Zacks has developed its own Style Scores system in an effort to find stocks with specific traits. Value investors will be interested in the system's "Value" category. Stocks with both "A" grades in the Value category and high Zacks Ranks are among the strongest value stocks on the market right now.

One company to watch right now is First American Financial (FAF). FAF is currently holding a Zacks Rank of #2 (Buy) and a Value grade of A. The stock is trading with a P/E ratio of 11.66, which compares to its industry's average of 24.49. Over the past 52 weeks, FAF's Forward P/E has been as high as 12.25 and as low as 9.21, with a median of 11.14.

We also note that FAF holds a PEG ratio of 1.06. This popular metric is similar to the widely-known P/E ratio, with the difference being that the PEG ratio also takes into account the company's expected earnings growth rate. FAF's PEG compares to its industry's average PEG of 2.96. Over the past 52 weeks, FAF's PEG has been as high as 1.06 and as low as 0.71, with a median of 0.91.

Value investors also use the P/S ratio. The P/S ratio is is calculated as price divided by sales. This is a popular metric because sales are harder to manipulate on an income statement, so they are often considered a better performance indicator. FAF has a P/S ratio of 1.08. This compares to its industry's average P/S of 1.21.

Finally, our model also underscores that FAF has a P/CF ratio of 9.88. This metric takes into account a company's operating cash flow and can be used to find stocks that are undervalued based on their solid cash outlook. This stock's P/CF looks attractive against its industry's average P/CF of 33.34. Within the past 12 months, FAF's P/CF has been as high as 10.50 and as low as 6.39, with a median of 9.29.

These figures are just a handful of the metrics value investors tend to look at, but they help show that First American Financial is likely being undervalued right now. Considering this, as well as the strength of its earnings outlook, FAF feels like a great value stock at the moment.


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