Should value investors consider Mallinckrodt (MNK) stock?

Value investing is undoubtedly one of the most popular methods for finding great stocks in any market environment. After all, who wouldn’t want to find stocks that either fly under the radar and represent attractive buying opportunities or offer tempting discounts compared to fair value?

One way to find these companies is to look at several key metrics and financial ratios, many of which are critical when selecting value stocks. Mallinckrodt Aktiengesellschaft Include MNK stock in this equation and find out if it’s a good choice for value investors right now or if investors following this methodology should look elsewhere for top picks:

P/E

One important metric that value investors always look at is the price-to-earnings (P/E) ratio. It tells us how much investors are willing to pay for each dollar of earnings from a given stock and is undoubtedly one of the most popular financial metrics in the world. The P/E ratio is best used to compare the stock’s current P/E to: a) its previous P/E, b) the industry average, and c) the overall market.

In this regard, Mallinckrodt has a P/E ratio of 2.7 for the last twelve months, as you can see in the following chart:

This level is actually quite cheap compared to the overall market, as the S&P 500’s P/E ratio is around 20.1. If we focus on the stock’s long-term P/E trend, Mallinckrodt’s current P/E at current levels is well below its average (9.1) over the past five years.

In addition, the stock’s P/E ratio is also cheap compared to the industry, as it is 9.5. This at least suggests that the stock is currently relatively undervalued compared to its competitors.

We should also point out that Mallinckrodt has a P/E (price to this year’s earnings) of 3.1, so one can expect the company’s share price to increase in the near future.

P/S ratio

Another important metric is the price-to-sales ratio. This approach compares the price of a particular stock to its total sales, with a lower value generally being considered better. Some people like this metric more than other value-based metrics because it takes into account sales, which are far more difficult to manipulate with accounting tricks than earnings.

Currently, Mallinckrodt has a P/S ratio of around 0.5. This is significantly lower than the S&P 500 average, which is currently at 3.3. As we can see in the chart below, this is also well below the highs this stock has seen in recent years.

If anything, this suggests some degree of undervalued trading – at least compared to historical norms.

Comprehensive value outlook

Overall, Mallinckrodt currently has a Value Style Score of A, putting it in the top 20% of all stocks we cover in this look. This makes MNK a solid choice for value investors, and some of its other key metrics make this pretty clear, too.

For example, the PEG ratio for Mallinckrodt is just 0.3, a value that is well below the industry average of 1.4. The PEG ratio is a modified P/E ratio that takes into account the stock’s earnings growth rate. In addition, the P/CF ratio (another good value indicator) is 1.2, which is much better than the industry average of 14.8. MNK is clearly a solid value pick in many ways.

What is the overall situation with the stock?

While Mallinckrodt could be a good choice for value investors, there are many other factors to consider before investing in this name. In particular, it’s worth noting that the company has a Growth Rating of F and a Momentum Score of C. This gives MNK a VGM Score — or its overarching fundamental rating — of C. (For more information on Zacks Style Scores, click here >>)

Meanwhile, the company’s recent earnings forecasts have been mixed at best. For the current quarter, forecasts have been revised up twice and down seven times in the past sixty days, while the full-year forecast has been revised up eight times and down three times in the same period.

This has had a noticeable impact on the consensus estimate, as the consensus estimate for the current quarter has fallen by about 5.1% over the past two months, while the estimate for the full year has increased by 0.2%. You can see the trend of the consensus estimate and the recent price action of the stock in the chart below:

Mallinckrodt Aktiengesellschaft Price and Consensus

Mallinckrodt Aktiengesellschaft price and consensus | Mallinckrodt Aktiengesellschaft share price

This rather mixed trend is the reason why the stock only has a Zacks Rank #3 (Hold) and we expect the company to perform in line with its performance in the short term.

Bottom line

Mallinckrodt is an inspired choice for value investors, as its incredible stats are hard to beat in this regard. However, with a sluggish industry ranking (bottom 19% of more than 250 industries) and a Zacks Rank of #3, it’s hard to get excited about this company overall. In fact, the sector has significantly underperformed the overall market over the past year, as you can see below:

Value investors may want to wait for estimates, analyst sentiment and broader factors to turn positive for the name. But once that happens, the stock could be an attractive pick.

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