For investors looking for chances where a company's market price may not completely show its basic business condition, a systematic filtering method can be a helpful first step. One way is to look for stocks that seem basically priced low while still showing good operational condition and earnings. This fits with central value investing ideas, which concentrate on finding securities trading for less than their real worth. The aim is to find companies that are not only low in price statistically, but are financially firm and able to produce returns, offering a possible "margin of safety."
A recent filter for "reasonable value" stocks, which looks for good valuation ratings together with acceptable scores for earnings, financial condition, and expansion, listed Smithfield Foods Inc (NASDAQ:SFD) as a possibility. The packaged meats company shows a situation where its market price seems low next to several important basic measures.
Valuation: The Center of the Chance
The strongest point for SFD as a value possibility is in its valuation measures. The company's stock seems priced cautiously compared to both its own earnings ability and wider market comparisons.
- Price-to-Earnings (P/E) Ratio: At 9.52, SFD's P/E ratio is seen as fair. This is much lower than the S&P 500 average of about 26.3. In its industry, 87% of similar companies trade at a higher P/E.
- Forward P/E Ratio: The view stays similar looking forward. With a forward P/E of 8.98, SFD is lower priced than over 96% of its industry rivals and well under the S&P 500 forward average.
- Enterprise Value to EBITDA: This measure, which includes debt, also indicates a price that is more appealing than most of the industry.
For a value investor, these ratios are the first sign. A low P/E can sometimes mean basic issues, but when joined with acceptable scores in other basic areas, as it is here, it may instead suggest a possible low pricing.
Financial Condition: A Firm Base
A low-priced stock is only a sound investment if the company is on firm financial footing. SFD's financial condition rating suggests a stable base, which is important for enduring economic changes and giving the safety buffer value investors want.
- Balance Sheet Condition: The company has a good Current Ratio of 3.10, showing enough ability to meet near-term needs and doing better than 85% of its industry. Its Debt-to-Equity ratio of 0.31 is at a sound level.
- Solvency: SFD's Altman-Z score of 3.42 shows a low near-term chance of financial difficulty and is higher than 73% of industry peers.
- Cash Flow: The company's debt-to-free-cash-flow ratio is also positive compared to most rivals.
This sound financial condition lowers the chance that the low price is a sign of coming financial problems, instead supporting the idea that the market may be missing the company's lasting balance sheet.
Earnings: Producing Returns
Value is not only about a low price; it is about buying a capable business at a reduced cost. SFD's earnings measures show a company that is efficiently turning its assets into profit.
- Return Measures: The company's Return on Invested Capital (ROIC) of 8.57% is with the better in its industry, doing better than 84% of peers. Its Return on Equity (ROE) of 13.36% is also good.
- Margins: SFD works with a Profit Margin of 5.66% and an Operating Margin of 7.56%, both of which put it in the better half of its industry. Importantly, these margins have shown gain in recent years.
These earnings numbers are key because they show that the company is not only continuing but making fair returns on capital, a central part of real worth.
Expansion and Dividend: A Varied but Acceptable View
The expansion view for SFD is more detailed, which is common for settled companies in mature industries. While past sales expansion has been a little negative, there are good signs.
- Earnings Expansion: The company has shown very good recent EPS expansion and a sound long-term yearly EPS expansion rate. Experts think this positive EPS expansion will continue in the mid-single digits.
- Sales Outlook: Future sales are expected to expand at a modest rate, which is a rise from recent patterns.
- Income Return: SFD gives a dividend yield of 4.54%, which is appealing both next to the S&P 500 and to many industry peers. This gives an income part while investors wait for possible price gain.
For a value plan focused on present basics and margin of safety, the existence of a firm dividend and expected steady earnings expansion can be enough, even if sales expansion is not high.
Conclusion
Smithfield Foods Inc shows a profile that fits a practical value investment filter. Its notable feature is a price that looks low across several measures when compared to both the market and its industry. This possible low pricing is supported by a financially sound company with good cash availability and workable debt, as well as earnings that are competitive within its industry. While its expansion path is average, it is joined with a shareholder-friendly dividend yield.
The mix of a low entry price, a firm balance sheet, and shown earnings creates a situation that value investors often examine: a possibly low-priced asset with a basic cushion against downside risk.
Interested in reviewing other stocks that fit this "reasonable value" profile? You can use the same filter used to find SFD to see a present list of possibilities by going to this link.
Disclaimer: This article is for information only and does not make financial advice, a suggestion, or an offer to buy or sell any security. The study is based on data and a filtering method described here. Investors should do their own complete research and think about their personal financial situation and risk tolerance before making any investment choices. Past results do not show future outcomes.
