Is Infosys (INFY) a Great Stock for Value Investors?

Value investing is easily one of the most popular ways to find great stocks in any market environment. After all, who wouldn’t want to find stocks that are either flying under the radar and are compelling buys, or offer up tantalizing discounts when compared to fair value?

One way to find these companies is by looking at several key metrics and financial ratios, many of which are crucial in the value stock selection process. Let’s put Infosys Limited INFY stock into this equation and find out if it is a good choice for value-oriented investors right now, or if investors subscribing to this methodology should look elsewhere for top picks:

PE Ratio

A key metric that value investors always look at is the Price to Earnings Ratio, or PE for short. This shows us how much investors are willing to pay for each dollar of earnings in a given stock, and is easily one of the most popular financial ratios in the world. The best use of the PE ratio is to compare the stock’s current ratio with: a) where this ratio has been in the past; b) how does it compare to the average for the industry/sector; and c) how does it compare to the market as a whole.

On this front, Infosys has a trailing twelve months PE ratio of 16.03, as you can see in the chart below:

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 compares in at about 19.84. If we focus on the stock’s long-term PE trend, the current level puts Infosys’s current PE ratio below its midpoint over the past five years, with the number having falling rapidly over the past few months.

Further, the stock’s PE also compares favorably with the Zacks classified IT Services industry’s trailing twelve months PE ratio, which stands at 28.74. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

We should also point out that Infosys has a forward PE ratio (price relative to this year’s earnings) of just 15.89, so it is fair to say that a slightly more value-oriented path may be ahead for Infosys stock in the near term too.

P/CF Ratio

An often overlooked ratio that can still be a great indicator of value is the price/cash flow metric. This ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. This is a preferred metric to some valuation investors because cash flows are (a) generally less prone to manipulation by the company’s management and (b) are less affected by variation in accounting policies between different companies.

The ratio is generally applied to find out whether a company’s stock is overpriced or underpriced with reference to its cash flows generation potential compared with its competitors. However, it is not commonly used for cross-industry comparison, as the average price to cash flow ratio varies from industry to industry.

In this case, Infosys’s P/CF ratio of 14.36 is significantly lower than the Zacks classified IT Services industry average of 25.75, which indicates that the stock is undervalued in this respect.

Broad Value Outlook

In aggregate, Infosys currently has a Zacks Value Style Score of ‘B’, putting it into the top 40% of all stocks we cover from this look. This makes Infosys a good choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Infosys is 1.36, a level that is lower than the industry average of 2.06. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate. Clearly, INFY is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Infosys might be a good choice for value investors, there are plenty of other factors to consider before investing in this name. In particular, it is worth noting that the company has a Growth grade of ‘C’ and a Momentum score of ‘F’. This gives INFY a Zacks VGM score—or its overarching fundamental grade—of ‘C’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been relatively stable. The current quarter has seen no estimate revisions in the past sixty days, while the full year estimate has seen three down and none up in the same time period.

This has had no impact on the consensus estimate though as the current quarter consensus estimate and the full year estimate has remained flat over the past two months. You can see the consensus estimate trend and recent price action for the stock in the chart below:
 

INFOSYS LTD Price and Consensus

INFOSYS LTD Price and Consensus | INFOSYS LTD Quote

This somewhat neutral stance is why the stock has just a Zacks Rank #3 (Hold) and why we are looking for in-line performance from the company in the near term.

Bottom Line

Infosys is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. Further, it has a favorable industry rank (among the Top 34%), of the Zacks Rank Industries. In fact, over the past five years, the Zacks IT Services industry has clearly outperformed the broader market, as you can see below:

However, because it carries a Zacks Rank #3, it is hard to get too excited about this company overall.

So, value investors might want to wait for estimates and analyst sentiment to turn around in this name first, but once that happens, this stock could be a compelling pick.

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