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Is Donegal Group (DGICA) a Suitable Value Stock Right Now?

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 Donegal Group, Inc. DGICA 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:

P/E 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, Donegal has a trailing twelve months PE ratio of 19.27, as you can see in the chart below:



Again, this level actually compares pretty favorably with the market at large, as the PE for the S&P 500 stands at about 20.50. If we focus on the long-term PE trend, DGICA’s current PE level puts it almost on par with its midpoint over the past five years. Moreover, the current level is fairly below the highs for this stock, suggesting it might be a good entry point.



Further, the stock’s PE compares favorably with the Zacks categorized www.zacks.com/stocks/industry-rank/industry/insurance-proper...">Insurance - Property And Casualty industry’s trailing twelve months PE ratio, which stands at 21.35. This indicates that the stock is undervalued right now, compared to its peers.



However, we should also point out that Donegal has a forward PE ratio (price relative to this year’s earnings) of 25.69, so it is fair to expect an increase in the company’s share price in the near future.

P/S Ratio

Another key metric to note is the Price/Sales ratio. This approach compares a given stock’s price to its total sales, where a lower reading is generally considered better. Some people like this metric more than other value-focused ones because it looks at sales, something that is far harder to manipulate with accounting tricks than earnings.

Right now, Donegal has a P/S ratio of about 0.48. This is lower than the industry average, which comes in at 3.18 right now.



If anything, DGICA is in the lower end of its range in the time period from a P/S metric, suggesting some level of undervalued trading—at least compared to historical norms.

Broad Value Outlook

In aggregate, Donegal currently has a Zacks Value Style Score of ‘A’, putting it into the top 20% of all stocks we cover from this look. This is because some of its other key metrics are favorable.

For example, the price/cash flow ratio (P/CF) for DGICA is 6.35, a level that is lower than the industry average of 9.79. The P/CF ratio ratio doesn’t take amortization and depreciation into account, so can give a more accurate picture of the financial health in a business. Additionally, it’s P/B ratio (used to compare a stock's market value to its book value) stands at 0.93, lower than the industry average of 1.30. Clearly, DGICA is a solid choice on the value front from multiple angles.

What About the Stock Overall?

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 DGICA a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)

Meanwhile, the company’s recent earnings estimates have been discouraging as both the current quarter and year have seen no upward estimate revision in the past 30 days compared to one downward.

As a result, the current quarter consensus estimate has inched lower from 24 cents per share to a loss of 7 cents in the past one month, while the full year estimate has dropped by 34.4%. You can see the consensus estimate trend and recent price action for the stock in the chart below:

Donegal Group, Inc. Price and Consensus

This negative trend is why the stock has just a Zacks Rank #3 (Hold) despite strong value metrics and why we are looking for in-line performance from the company in the near term.
 
Bottom Line

Donegal is an inspired choice for value investors, as it is hard to beat its good lineup of statistics on this front. However, with a sluggish industry rank (bottom 10% out of 265 industries) and a Zacks Rank #3, it is hard to get too excited about this company overall. In fact, over the past six months, the Zacks Insurance - Property And Casualty industry has clearly underperformed the broader market, as you can see below:



So, value investors might want to wait for analyst sentiments, estimates and broader factors to turn favorable in this name first, but once that happen, this stock could be a compelling pick.

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