For investors using a disciplined value method, the search often starts with a quantitative filter. The aim is to find companies trading below their intrinsic value, but without giving up on the basic health of the business. A "Decent Value" filter, which selects stocks with good valuation ratings while keeping acceptable scores in profitability, financial health, and growth, tries to do exactly that. It tries to steer clear of the classic "value trap", a cheap stock that is cheap for a bad reason, by checking the company is still basically sound. One name that recently appeared from such a filter is Signet Jewelers Ltd (NYSE:SIG), the world's largest retailer of diamond jewelry.
Examining the Valuation
The central idea of value investing is buying a dollar's worth of assets for fifty cents. Signet's current valuation numbers imply the market may be giving such a discount. According to ChartMill's fundamental analysis, Signet receives a good Valuation Rating of 7 out of 10, showing it is priced well compared to both its industry and the wider market.
- Price-to-Earnings (P/E) Ratio: At 8.58, Signet's P/E ratio is much lower than the S&P 500 average of about 27.25. More significantly, it is less expensive than over 93% of similar companies in the Specialty Retail industry.
- Forward P/E Ratio: The view stays positive when looking forward. With a forward P/E of 8.06, Signet is valued lower than nearly 96% of its industry rivals.
- Cash Flow and EBITDA Multiples: The value story goes beyond earnings. The company's Enterprise Value to EBITDA and Price to Free Cash Flow ratios are also low, ranking better than about 91% and 94% of the industry, in that order.
This group of low multiples builds the base of the value argument. For a value investor, these numbers imply the stock price does not completely show the company's current earnings ability or cash creation.
Evaluating Financial Health and Stability
A low price is not useful if the company is in a weak position. This is where the "Decent Value" filter's need for financial health becomes important. Signet gets a firm 7 out of 10 for Health, giving a cushion against the risks found in low-priced situations.
The report points out several main positives:
- Strong Balance Sheet: Signet has no debt, putting its Debt/Equity and Debt/FCF ratios at zero. This is a rare position that removes interest cost risk and gives notable financial room to maneuver, particularly when interest rates are higher.
- Solvency: The company's Altman-Z score of 3.32 shows a low short-term chance of financial trouble and does better than over 77% of its industry.
- Shareholder-Friendly Actions: Management has been steadily lowering the number of shares outstanding over the past one and five years, a move that can raise ownership stakes and earnings per share for continuing investors.
This financial strength is key. It means Signet has the steadiness to handle economic ups and downs and the capacity to possibly invest in its business or give capital back to shareholders, all while trading at a large discount.
Profitability: The Driver Behind the Value
A low-priced company must also be a profitable one. Value investing is not about buying failing companies; it's about buying good companies at a low price. Signet's Profitability Rating of 6 out of 10 shows a company with acceptable, and in some parts very good, earning ability.
- Operating Efficiency: Signet's Operating Margin of 7.94% is notable, doing better than 77% of the specialty retail sector. This margin has also increased well in recent years, hinting at better operational management.
- Return on Capital: The Return on Invested Capital (ROIC) of 11.57% is firm, beating 81% of industry peers. Significantly, this most recent ROIC number is higher than the company's three-year average, showing a good direction in capital use efficiency.
These numbers prove that Signet is not just a retailer with a low stock price; it is a retailer that creates reasonable profits from its operations. The rising margins and high ROIC hint the management team is running the business well, a main qualitative point value investors look for.
Growth in the Setting of Value
Pure value stocks sometimes do not have growth, but the "Decent Value" method looks for a middle ground. Signet's Growth Rating is a moderate 4 out of 10, which is fine considering its low valuation. The report shows a varied but steady view.
- Earnings Growth: While last year's Revenue was nearly unchanged, the long-term direction in Earnings Per Share (EPS) is good, having increased at an average yearly rate of over 21% in recent years.
- Future Expectations: Analysts estimate future EPS growth of almost 10% per year, along with small revenue growth. This forward view, while not rapid, backs the case that this is a steady business with chance for slow expansion, not one in lasting downturn.
For a value investor, this amount of growth is enough. The main source of returns is expected to be the move of the stock's price toward its intrinsic value, not very fast growth. The existence of some growth just helps make sure the business stays current and can raise its intrinsic value over time.
Summary and Next Steps
Signet Jewelers shows an interesting outline for investors filtering for value chances. It trades at a large discount to the market and its industry based on normal valuation numbers, yet it is backed by a very firm, debt-free balance sheet and shows firm profitability with better operational margins. While its growth is not high, it is good and predicted to keep going, helping to lower the risk of a value trap.
The mix of a low price, firm financial health, and acceptable profitability fits well with a disciplined value investing method that looks for a "margin of safety." Naturally, investors must think about industry-specific risks, like consumer discretionary spending patterns and competitive forces.
Interested in finding other stocks that match this "Decent Value" outline? You can use the same filter used to find Signet Jewelers to find more possible chances. View the "Decent Value Stocks" filter here.
For a complete look at all the fundamental parts behind the ratings discussed, you can see the full ChartMill Fundamental Analysis Report for SIG.
Disclaimer: This article is for informational purposes only and does not constitute financial advice, a recommendation, or an offer or solicitation to buy or sell any securities. The analysis is based on data and ratings provided by ChartMill, and investors should conduct their own due diligence and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results.
