Investors interested in stocks from the Beverages - Alcohol sector have probably already heard of Constellation Brands (STZ) and Diageo (DEO). But which of these two companies is the best option for those looking for undervalued stocks? Let's take a closer look.
We have found that the best way to discover great value opportunities is to pair a strong Zacks Rank with a great grade in the Value category of our Style Scores system. The Zacks Rank favors stocks with strong earnings estimate revision trends, and our Style Scores highlight companies with specific traits.
Constellation Brands and Diageo are sporting Zacks Ranks of #2 (Buy) and #4 (Sell), respectively, right now. Investors should feel comfortable knowing that STZ likely has seen a stronger improvement to its earnings outlook than DEO has recently. But this is only part of the picture for value investors.
Value investors analyze a variety of traditional, tried-and-true metrics to help find companies that they believe are undervalued at their current share price levels.
The Value category of the Style Scores system identifies undervalued companies by looking at a number of key metrics. These include the long-favored P/E ratio, P/S ratio, earnings yield, cash flow per share, and a variety of other fundamentals that help us determine a company's fair value.
STZ currently has a forward P/E ratio of 16.10, while DEO has a forward P/E of 18.88. We also note that STZ has a PEG ratio of 1.55. This metric is used similarly to the famous P/E ratio, but the PEG ratio also takes into account the stock's expected earnings growth rate. DEO currently has a PEG ratio of 3.70.
Another notable valuation metric for STZ is its P/B ratio of 4.94. 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, DEO has a P/B of 5.85.
Based on these metrics and many more, STZ holds a Value grade of B, while DEO has a Value grade of D.
STZ sticks out from DEO in both our Zacks Rank and Style Scores models, so value investors will likely feel that STZ is the better option right now.
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