Philip Morris & 3 More Stocks With Strong Interest Coverage to Buy Now

Relying solely on stock price movements without understanding a company’s fundamentals can cause investors to lose money. Investors must carefully review a company’s financial health to make informed decisions, especially in today’s unpredictable market. That is even more important now, as the U.S. economy faces added uncertainty from fluctuating energy prices, persistent inflation pressures and market volatility tied to the war in the Middle East. While sales and earnings are often the go-to metrics, they can sometimes be misleading and may not show whether a company has the financial strength to cover its obligations. This is where the interest coverage ratio becomes important.

Kennametal Inc. KMT, Casey's General Stores, Inc. CASY, Ralph Lauren Corporation RL and Philip Morris International Inc. PM stand out for their strong interest coverage ratios.

Why Interest Coverage Ratio?

The interest coverage ratio is used to determine how effectively a company can pay interest charges on its debt.

Debt, which is crucial to financing operations for the majority of companies, comes at a cost called interest. Interest expense has a direct bearing on the profitability of a company. The company’s creditworthiness depends on how effectively it meets its interest obligations. Therefore, the interest coverage ratio is one of the important criteria to factor in before making any investment decision.

Interest Coverage Ratio = Earnings before Interest & Taxes (EBIT) divided by Interest Expense.

The interest coverage ratio suggests how many times the interest could be paid from earnings and gauges the margin of safety a firm has for paying interest.

An interest coverage ratio lower than 1 suggests that the company is unable to fulfill its interest obligations and could default on repaying debt. A company capable of generating earnings well above its interest expense can withstand financial hardships. One should also track the company’s past performance to determine whether the interest coverage ratio has improved or worsened over time.

The Winning Strategy

Apart from having an interest coverage ratio that is more than the industry average, adding a favorable Zacks Rank and a VGM Score of A or B to your search criteria should lead to better results.

Interest coverage ratio greater than X-Industry Median

Price greater than or equal to 5: The stocks must all be trading at a minimum of $5 or higher.

5-Year Historical EPS Growth (%) greater than X-Industry Median: Stocks with a strong EPS growth history.

Projected EPS Growth (%) greater than X-Industry Median: This is the projected EPS growth over the next three to five years. This shows that the stock has near-term earnings growth potential.

Average 20-Day Volume greater than 100,000: A substantial trading volume ensures that the stock is easily tradable.

Zacks Rank less than or equal to 2: Zacks Rank #1 (Strong Buy) or 2 (Buy) stocks are known to outperform irrespective of the market environment.

VGM Score of less than or equal to B: Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best upside potential.

Here are four of the 10 stocks that qualified the screening:

Kennametal, a global leader in metal cutting solutions, sports a Zacks Rank #1 and has a VGM Score of B. KMT has a trailing four-quarter earnings surprise of 35.4%, on average. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Kennametal’s current financial-year sales and EPS indicates growth of 12.1% and 72.4%, respectively, from the year-ago period.

Casey's, one of the leading convenience store chains in the United States, carries a Zacks Rank #2 and has a VGM Score of B. CASY has a trailing four-quarter earnings surprise of 20%, on average.

The Zacks Consensus Estimate for Casey's current financial-year sales and EPS indicates growth of 8.2% and 23.6%, respectively, from the year-ago period.

Ralph Lauren, a global leader in the design, marketing and distribution of luxury lifestyle products, carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 9.7%, on average.

The Zacks Consensus Estimate for Ralph Lauren's current financial-year sales and EPS implies growth of 12.4% and 31.8%, respectively, from the year-ago period. RL has a VGM Score of B.

Philip Morris, a tobacco company, carries a Zacks Rank #2 and has a VGM Score of B. PM has a trailing four-quarter earnings surprise of 4.2%, on average.

The Zacks Consensus Estimate for Philip Morris’ current financial-year sales and EPS indicates growth of 8.2% and 12.6%, respectively, from the year-ago period.

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Philip Morris International Inc. (PM): Free Stock Analysis Report

Ralph Lauren Corporation (RL): Free Stock Analysis Report

Kennametal Inc. (KMT): Free Stock Analysis Report

Casey's General Stores, Inc. (CASY): Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

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