For investors looking for chances where the market price may not fully show a company's true worth, a methodical value investing method can be a useful guide. This plan focuses on finding stocks selling for less than their real value, often shown by good valuation measures, while checking the business is fundamentally strong. One way to find these companies is to look for those with good valuation marks that also show acceptable health, earnings, and expansion—a mix that points to quality at a fair price. A recent search using this idea has pointed to NETSCOUT SYSTEMS INC (NASDAQ:NTCT) as a stock needing more examination.
Examining Valuation
The base of any value investment argument is a good price compared to the company's financial results. According to the fundamental analysis report for NetScout, the valuation view is positive. The company gets a high ChartMill Valuation Rating of 8 out of 10, putting it with the more low-cost names in its field.
- Price-to-Earnings (P/E): At 11.55, NetScout's P/E ratio is seen as very fair. It is priced lower than 91.67% of similar companies in the Communications Equipment industry and is well under the current S&P 500 average of 27.54.
- Forward P/E: The forward-looking measure is also good at 10.85, showing the stock is priced lower than 95.83% of its industry rivals.
- Enterprise Value to EBITDA & Price/Free Cash Flow: Other valuation numbers support this. The Enterprise Value to EBITDA ratio shows a low-cost valuation relative to the industry, and based on the Price/Free Cash Flow ratio, almost all industry peers are priced higher.
For a value investor, these measures are the first filter. A low valuation makes the chance for a "margin of safety"—a gap between the price paid and the calculated real value. Yet, a low-cost stock is only a good buy if the business is stable and earns money, which is why the search also asked for acceptable marks in health and earnings.
Reviewing Financial Health and Earnings
A low valuation can sometimes be a problem, pointing to deeper business issues. So, checking a company's financial strength and ability to earn is key. NetScout's report shows a varied but overall okay picture on health, with a mark of 6, and a better result on earnings, with a mark of 7.
The company's financial health is helped by a very good cash position and a clear balance sheet:
- It has no debt, putting its Debt/Equity and Debt/Free Cash Flow ratios with the best in its industry.
- Its Current and Quick Ratios (1.88 and 1.84) show more than enough ability to cover short-term needs and are good within the field.
On the earnings side, NetScout shows solid operational performance:
- It has a high Gross Margin of 79.21%, doing better than 95.83% of its industry peers.
- Its Profit Margin of 10.38% and Operating Margin of 12.74% are also with the best in the industry, doing better than 83.33% and 77.08% of rivals.
- Returns on Assets, Equity, and Invested Capital are all above the industry middle, showing good use of money.
These points answer main questions for a value investor. Strong earnings mean the business model works and can create cash, while a healthy balance sheet with no debt lowers financial risk and gives stability—both needed for a company expected to last until the market sees its value.
Expansion Points
While strict value stocks may not show fast expansion, some forward movement is needed to support the idea that real value will rise over time. NetScout's Expansion Rating of 4 shows a company in a steady, if not fast, condition.
The past year had good changes, with Earnings Per Share rising 19.21% and Revenue going up 9.60%. However, the five-year trend shows a story of slower, more difficult expansion, with Revenue showing a small average yearly drop. Looking forward, analysts expect a return to small growth in both Revenue and EPS. For a value plan, this careful expansion picture can be okay, especially when joined with high earnings and a low-cost valuation. The hope is not for fast growth but for steady performance that lets the company's earning power be more fully priced by the market over time.
Final Points
NetScout Systems shows a profile that fits a methodical value-looking process. It trades at a large discount to both its industry and the wider market based on normal earnings multiples, giving a possible start point with a margin of safety. This discount is not joined with a failing business; instead, the company keeps high earnings margins, a clean debt-free balance sheet, and hopes for steady, low growth. This mix of low-cost valuation and fundamental strength is exactly what searches like the "Decent Value" filter are made to find.
Investors wanting to look at other stocks that meet similar needs of good valuation plus acceptable fundamentals can see the full search results here.
Disclaimer: This article is for information only and does not make financial advice, a suggestion to buy or sell any security, or a support of any investment plan. The information given is based on supplied data and should not be the only base for an investment choice. Investors should do their own full study and think about their personal money situation and risk comfort before making any investment.
