The Price-To-Book Ratio is a Top Tool To Evaluate Companies

Once again you will be looking for a low value for the price to book value as it will indicate that a stock is undervalued. This is more desirable. Growth investors increasingly make use of this metric to identify the best stocks to invest in.

The book value of equity is defined as the value of company's assets as shown on the balance sheet. It is the difference between the book value of assets and the book value of liabilities.

Let us look at an example. If company XYZ has $300 million in assets and $100 million in liabilities, then the book value for this particular company would be $200 million. If there are 20 million shares outstanding, then each share would represent $10 of book value. If the market price for a share is currently $25, then the P/B ratio would be 2.5 (25/10).

Be wary of companies that are trading for less than their book value. Also, investors should steer away from stocks with a P/B less than one. It signifies that the asset value is overstated and the firm is earning a dismal return on its assets.

The best companies are those that have a high stock price relative to their book value. They are earning a high return on their assets. When looking at P/B, pay close attention to the ROE as well. A low ROE in comparison to the P/B can be problematic.

Book values tend to get distorted. Share buybacks have an effect on the P/B as the capital gets reduced on the balance sheet. In addition, the book value plunges when cash is made use of to fund a capital expenditure for instance.

In the end, the P/B ratio offers a reality check for an investor and a valuable one at that. The issue with P/B is that it ignores intangible assets like brand value, intellectual property, goodwill and patents. Companies like Microsoft are renowned for their significant intellectual property in comparison to physical property and this ratio does not capture that aspect.

her over the long term.

Priceline Group Offers Deep Value For Many Years To Come

When skimming for value stocks, Priceline Group Inc (NASDAQ:PCLN) undoubtedly catches the eye. Stock analysts have coveted this stock for several years and now they are predicting that the online travel stock will post an earnings per share of $57.73. Priceline's brands are Booking.com, agoda.com, KAYAK, OpenTable and rentalcars.com. OpenTable is a recent acquisition by the Priceline Group for $2.6 billion. The company's CEO Darren Huston commented that this purchase would enhance the booking experience for Priceline's global customers.

With a PEG ratio of 1.08, Priceline is undervalued relative to its high-growth potential. While the best value stocks generally have PEG values below 1.0, we can make an exception for Priceline given its massive size and immense reach. Furthermore, the PEG ratio is lower for Priceline in comparison to Expedia Inc. (NASDAQ:EXPE) and Orbitz Worldwide (NYSE:OWW). Additionally, TripAdvisor, Inc (NASDAQ: TRIP) has a reported PEG value of 2.53. So you can definitely see that you can't go wrong with PCLN as you are paying much less for future earnings growth.

The P/E ratio tells a similar story as far as the attractiveness of Priceline is concerned. The 2015 estimate is 20.13 and it is the lowest value when comparing with industry peers. Going forward, Priceline.com continues to be expected to trade an attractive P/E a lot lower than its competitors. Expedia trades at a much higher P/E at 33.47 and will continue to be quite expensive in the estimates for the next two years. Value investors tend to pick the stocks with the lower P/Es in a particular industry. So this metric also makes PCLN look good.

While Wall Street remains fairly cautious on PCLN, it may be time to buy some shares. Most of the analysts' concern centers on increased competition in form of the Expedia Inc. - its chief rival. However, given the stock's attractive valuation multiples and robust fundamental performance, I am inclined to believe that Priceline shares are only going to keep surging higher over the long term. 

Panera’s New Growth Avenues Poised To Become More Meaning Cash Flow Contributors

Technomic recently released its annual 2017 Top 500 Chain Restaurant Report, which examines the top players in the chain restaurant industry and ranks those restaurants by sales. Unsurprisingly, the results of the annual ranking show that fast casual continues to be a powerhouse — the segment grew sales 8% in 2016. Leading the pack was Panera Bread, which inched out Sonic Drive-In for the number 11 spot.

One of the biggest reasons to consider Panera is its low debt/equity ratio, which is around the same range as Buffalo Wild Wings (BWLD). With the general economic climate over the past couple of years, this value for the debt/equity ratio makes Panera particularly attractive.

Success of Panera 2.0

With Panera 2.0, there has been a focus on changes in consumer behavior around order, payment, production and consumption to help “bend the arc” on traffic trends. So it must be said that the ultimate goal of improving guest experience in order to build Panera’s competitive position has been achieved. Panera has become a better competitive alternative and expanded growth opportunities. Costs have become more manageable as sales have ramped up, with both labor and other controllable expenses falling as a percent of sales. Panera 2.0 customer experience investments have reinforced the brand intangible asset underpinning my positive moat trend.

There was a lot of transparency with the 2.0 market rollout allowing investors to read the results and make their own determination as to success of the initiative.

Downside Factor: P/E ratio is rather high

When it comes to fundamental ratios, the P/E is very valuable. As an investor, the best strategy is to pick the stock with the lower P/E. Right now, the P/E for Panera stands at 47.57 which is on the high side. Generally, this is acceptable in the fast casual and sports bar industry. But it makes for a tough scenario for investors when deciding whether to buy the stock or not. Additionally, there is the P/B ratio which is not acceptable at a value of 25.11.

At the same time, the big thing to love about BWLD is the return on assets currently and over the past five years. It suggests that its relatively high operating returns are sustainable.

Strong Balance Sheet Is The Plus Factor

The one noteworthy thing about Panera is that there is less debt in the balance sheet. This is a particular favorable time to be investing in companies with lower debt levels as money is hard to come by this year. The company can look to formulate a solid growth strategy that doesn't reek of desperation when it has less debt to deal with. At a time when most people and companies are drowning in debt, the best strategy is to move away from excessive debt levels and leverage. Panera gives an investor this opportunity. As mentioned earlier in this piece, the low debt/equity ratio is indicative of a strong balance sheet.

Global Economic Spectrum: People Always Have Money For Food

There are two main issues that are impacting the world right now. One is the issue with total global debt which continues to grow at a rather swift pace. The other predicament has been the rise in oil prices. The problem with high debt levels is that given an economic slowdown, a jump in interest rates or some other financial shock, business and household borrowers won’t be able to service their debts. As a consequence, consumption dips. High oil prices also have this effect on consumption. But there is always one thing that can sell like hotcakes and that is fast food.

Valuation

I believe Panera can ultimately deliver long-term EPS growth in the mid teens, likely at the lower end of their prior long-term guidance for 15-20%. With that said, the timeframe over which this will once again be achieved on a consistent basis is uncertain (acknowledged by management). And such is only accentuated as investors contemplate Panera’s move from growth to maturity, coupled with plans to begin refranchising efforts, pushing franchises north of the prior 50/50 split. While there is a lack of near-term EPS growth visibility, I believe the shares will once again sustain a multiple near the upper end of the recent ranges, in anticipation of improved fundamental performance, with an expected return to double-digit EPS growth in 2018, and accelerating further in 2019.

Risks

Competition, specifically related to price, service, locations and food quality, is the most significant risk faced by companies in the restaurant industry. If there was a significant change in the competitive landscape from current levels, the valuation would have to be reconsidered. Other risks that would require me to review this investment thesis include food safety, including the effects of food borne illness, changes in governmental regulations surrounding the restaurant industry and fluctuations in interest rates and commodity prices.