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

Microchip Technology Incorporated


MCHP

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 PE ratio with: a) where this ratio has been in the past; b) how it compares to the average for the industry/sector; and c) how it compares to the market as a whole.

On this front, Microchip Technology has a trailing twelve months PE ratio of 13.82, as you can see in the chart below:

Image Source: Zacks Investment Research

This level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 17.4. If we focus on the long-term PE trend, Microchip Technology’s current PE level puts it below its midpoint (which is 17.73) over the past five years. Moreover, the current level stands well below the highs for the stock, suggesting that it can be a solid entry point.

Image Source: Zacks Investment Research

Further, the stock’s PE also compares favorably with the Zacks Computer & Technology sector’s trailing twelve months PE ratio, which stands at 20.05. At the very least, this indicates that the stock is relatively undervalued right now, compared to its peers.

Image Source: Zacks Investment Research

We should also point out that Microchip Technology has a forward PE ratio (price relative to this year’s earnings) of just 11.77, so it is fair to say that a slightly more value-oriented path may be ahead for Microchip Technology stock in the near term too.

PEG Ratio

While earnings are certainly important, it is essential to know how much you are paying for the growth of earnings as well. One can easily do that with the PEG ratio (ratio of the P/E to the expected future earnings growth rate).The PEG ratio gives a more complete picture of the valuation of a stock than the P/E ratio.

Microchip Technology’s PEG ratio stands at just 0.76, compared with the Zacks Computer-Mini industry average of 0.88. This suggests a decent undervalued trading relative to its earnings growth potential right now.

Image Source: Zacks Investment Research

Broad Value Outlook

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

For example, the P/CF ratio (another great indicator of value) comes in at 10.77, which is far better than the industry average of 11.30. Clearly, MCHP is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Microchip Technology 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 Score of B and a Momentum Score of D. This gives MCHP a Zacks VGM score — or its overarching fundamental grade — of B. (You can read more about the Zacks Style Scores

here >>

)

Meanwhile, the company’s recent earnings estimates have been robust at best. The current quarter has seen nine estimates go higher in the past sixty days compared to none lower, while the full year estimate has seen ten up and none down in the same time period.

This has had a noticeable impact on the consensus estimate though as the current quarter consensus estimate has risen by 6.2% in the past two months, while the full year estimate has inched higher by 4.2%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

This somewhat favorable trend is why the stock has just a Zacks Rank #2 (Buy) and why we are looking for better performance from the company in the near term.

Bottom Line

Microchip Technology is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. However, with a sluggish industry rank (among Bottom 20% of more than 250 industries), it is hard to get too excited about this company overall. Nevertheless, over the past two years, the Zacks Semiconductor – Analog and Mixed industry has clearly outperformed the broader market, as you can see below:

Image Source: Zacks Investment Research

So, it might pay for value investors to delve deeper into the company’s prospects, as fundamentals indicate that this stock could be a compelling pick.

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