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Does Cullen/Frost Bankers (CFR) Make for a Suitable Value Pick?

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 Cullen/Frost Bankers, Inc. CFR 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, Cullen/Frost Bankers has a trailing twelve months PE ratio of 19.48. This level compares favorably with the market at large, as the PE ratio for the S&P 500 comes in at about 20.20.

If we focus on the long-term trend of the stock, the current level puts Cullen/Frost Bankers’ current PE near its highs over the past five years, suggesting that the stock is somewhat overvalued compared to its own historical levels.

Further, the stock’s PE compares unfavorably with the Zacks classified Banks - Southwest industry’s trailing twelve months PE ratio, which stands at 15.64. At the very least, this indicates that the stock is relatively overvalued right now, compared to its peers.

However, we should point out that Cullen/Frost Bankers has a forward PE ratio (price relative to this year’s earnings) of 18.02 – which is lower than the current figure. So it is fair to say that a slightly more value-oriented path may be ahead for Cullen/Frost Bankers stock in the near term.

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, Cullen/Frost Bankers P/CF ratio of 13.87 is lower than the Zacks classified Banks - Southwest industry average of 14.14, which indicates that the stock is undervalued in this respect.

Broad Value Outlook

In aggregate, Cullen/Frost Bankers 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 Cullen/Frost Bankers an apt choice for value investors, and some of its other key metrics make this pretty clear too.

For example, the PEG ratio for Cullen/Frost Bankers is just 1.90, a level that is lower than the industry average of 1.94. The PEG ratio is a modified PE ratio that takes into account the stock’s earnings growth rate.

Furthermore, the EV/EBITDA for Cullen/Frost Bankers is just 4.10, much lower than the industry average of 13.66. The EV/EBITDA multiple (Enterprise Value/ Earnings before Interest Tax Depreciation and Amortization) is capital structure-neutral, as it takes into account the level of debt on a company’s balance sheet, not just its equity.

Clearly, CFR is a solid choice on the value front from multiple angles.

What About the Stock Overall?

Though Cullen/Frost Bankers 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 ‘D’ and a Momentum score of ‘B’. This gives CFR a Zacks VGM score—or its overarching fundamental grade—of ‘B’. (You can read more about the Zacks Style Scores here >>)

Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics, and a good VGM score can increase your odds of success. All things considered, Cullen/Frost Bankers seems to have pretty striking prospects.

Meanwhile, the company’s recent earnings estimates have been trending upwards lately. The current quarter has seen five estimates go higher in the past thirty days compared to none lower, while the full year estimate has seen four upward revisions versus none in the opposite direction, in the same time period.

This has had a small impact on the consensus estimate though as the current quarter consensus estimate has remained constant over the past month, while the full year estimate has inched up 0.4%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Cullen/Frost Bankers, Inc. Price and Consensus

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

Bottom Line

Cullen/Frost Bankers is an inspired choice for value investors, as it is hard to beat its incredible lineup of statistics on this front. With a formidable industry rank (among the Top 12%) and strong Zacks Rank, Cullen/Frost Bankers looks like a strong value contender. In fact, over the past year, the Zacks Banks - Southwest industry has clearly outperformed the broader market, as you can see below:

Moreover, with a further rise in interest rates and improving non-interest bearing deposits, the company's net interest income and net interest margin is expected to grow. Additionally, the approval of the Financial Choice Act will support its profitability. Also, Cullen/Frost’s strong capital position keeps it well poised to continue capital deployment activities, thereby boosting shareholders’ confidence.

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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