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5 Value Stocks With Exciting EV/EBITDA Ratios to Own Now
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Value investors generally tend to cling to the price-to-earnings (P/E) strategy while looking for stocks that are trading at a bargain. Undoubtedly, P/E is the most popular multiple used by investors for evaluating the fair market value of a stock. But even this straightforward, broadly used valuation metric is not without its shortcomings.
EV/EBITDA is a Better Approach, Here’s Why
While P/E enjoys great popularity, a less-used and more-complicated metric called EV/EBITDA gains an upper hand as it offers a clearer picture of a company’s valuation and earnings potential. EV/EBITDA, also known as the enterprise multiple, has a more complete approach to valuation as it determines a firm’s total value. P/E, on the other hand, considers only its equity portion.
EV/EBITDA is the enterprise value (EV) of a stock divided by its earnings before interest, taxes, depreciation and amortization (EBITDA). EV is the sum of a company’s market capitalization, its debt and preferred stock minus cash and cash equivalents.
The other element of the ratio, EBITDA gives the true picture of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that depress net earnings. It is also often used as a proxy for cash flows.
Usually, the lower the EV/EBITDA ratio, the more attractive it is. A low EV/EBITDA ratio could imply that a stock is potentially undervalued and vice versa.
However, unlike P/E ratio, EV/EBITDA takes into account the debt on a company’s balance sheet. For this reason, EV/EBITDA is usually used to value possible acquisition targets. Stocks with a low EV/EBITDA multiple could be seen as potential takeover candidates.
Moreover, P/E can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV/EBITDA is less open to manipulation and can also be used to value companies that are making loss but are EBITDA-positive.
EV/EBITDA is also a useful tool in measuring the value of companies that are highly leveraged and have a high degree of depreciation. Moreover, the ratio allows the comparison of companies with different debt levels.
However, EV/EBITDA is not without its flaws and it alone can’t conclusively determine a stock’s inherent potential and future performance. It varies across industries (a high-growth industry normally has higher multiple and vice versa) and is typically not appropriate while comparing stocks in different industries given their diverse capital expenditure requirements.
Therefore, instead of solely relying on EV/EBITDA, you can club it with the other key ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to achieve the desired outcome.
Screening Criteria
Here are the parameters to screen for value stocks:
EV/EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV/EBITDA ratio represents a cheaper valuation.
P/E using (F1) less than X-Industry Median: This metric screens stocks that are trading at a discount to their peers.
P/B less than X-Industry Median: A lower P/B compared with the industry average implies that the stock is undervalued.
P/S less than X-Industry Median: The lower the P/S ratio the more attractive the stock is as investors will have to pay a smaller price for the same amount of sales generated by the company.
Estimated One-Year EPS Growth F(1)/F(0) greater than or equal to X-Industry Median: This parameter will help in screening stocks that have growth rates higher than the industry median. This is a meaningful indicator as decent earnings growth always adds to investor optimism.
Average 20-day Volume greater than or equal to 100,000: The addition of this metric ensures that shares can be traded easily.
Current Price greater than or equal to $5: This parameter will help in screening stocks that are trading at a minimum price of $5 or higher.
Zacks Rank less than or equal to 2: No screening is complete without the Zacks Rank, which has proven its worth since inception. It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to beat adversities and outperform the market.
Value Score of less than or equal to B: Our research shows that stocks with a Value Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are five of the 11 stocks that passed the screen:
Huntsman Corporation (HUN - Free Report) is among the world's leading global manufacturers of differentiated and commodity chemical products for a variety of industrial and consumer applications. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 42.3% for 2018 and a Value Score of A.
Covenant Transportation Group, Inc. is a truckload carrier that offers just-in-time and other premium transportation services throughout the United States. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 153.6% for 2018 and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
ON Semiconductor Corporation (ON - Free Report) is a supplier of broadband and power management integrated circuits and standard semiconductors used in numerous advanced devices. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 26% for 2018 and a Value Score of A.
Rayonier Advanced Materials Inc. (RYAM - Free Report) operates as a global supplier of cellulose specialties products, a natural polymer for the chemical industry. The stock has an expected year-over-year earnings growth rate of 124.7% for 2018. It currently has a Value Score of A and a Zacks Rank #2.
Aflac Incorporated (AFL - Free Report) provides financial protection to more than 50 million people worldwide. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 19.1% for 2018. It has a Value Score of A.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »
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5 Value Stocks With Exciting EV/EBITDA Ratios to Own Now
Value investors generally tend to cling to the price-to-earnings (P/E) strategy while looking for stocks that are trading at a bargain. Undoubtedly, P/E is the most popular multiple used by investors for evaluating the fair market value of a stock. But even this straightforward, broadly used valuation metric is not without its shortcomings.
EV/EBITDA is a Better Approach, Here’s Why
While P/E enjoys great popularity, a less-used and more-complicated metric called EV/EBITDA gains an upper hand as it offers a clearer picture of a company’s valuation and earnings potential. EV/EBITDA, also known as the enterprise multiple, has a more complete approach to valuation as it determines a firm’s total value. P/E, on the other hand, considers only its equity portion.
EV/EBITDA is the enterprise value (EV) of a stock divided by its earnings before interest, taxes, depreciation and amortization (EBITDA). EV is the sum of a company’s market capitalization, its debt and preferred stock minus cash and cash equivalents.
The other element of the ratio, EBITDA gives the true picture of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that depress net earnings. It is also often used as a proxy for cash flows.
Usually, the lower the EV/EBITDA ratio, the more attractive it is. A low EV/EBITDA ratio could imply that a stock is potentially undervalued and vice versa.
However, unlike P/E ratio, EV/EBITDA takes into account the debt on a company’s balance sheet. For this reason, EV/EBITDA is usually used to value possible acquisition targets. Stocks with a low EV/EBITDA multiple could be seen as potential takeover candidates.
Moreover, P/E can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV/EBITDA is less open to manipulation and can also be used to value companies that are making loss but are EBITDA-positive.
EV/EBITDA is also a useful tool in measuring the value of companies that are highly leveraged and have a high degree of depreciation. Moreover, the ratio allows the comparison of companies with different debt levels.
However, EV/EBITDA is not without its flaws and it alone can’t conclusively determine a stock’s inherent potential and future performance. It varies across industries (a high-growth industry normally has higher multiple and vice versa) and is typically not appropriate while comparing stocks in different industries given their diverse capital expenditure requirements.
Therefore, instead of solely relying on EV/EBITDA, you can club it with the other key ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to achieve the desired outcome.
Screening Criteria
Here are the parameters to screen for value stocks:
EV/EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV/EBITDA ratio represents a cheaper valuation.
P/E using (F1) less than X-Industry Median: This metric screens stocks that are trading at a discount to their peers.
P/B less than X-Industry Median: A lower P/B compared with the industry average implies that the stock is undervalued.
P/S less than X-Industry Median: The lower the P/S ratio the more attractive the stock is as investors will have to pay a smaller price for the same amount of sales generated by the company.
Estimated One-Year EPS Growth F(1)/F(0) greater than or equal to X-Industry Median: This parameter will help in screening stocks that have growth rates higher than the industry median. This is a meaningful indicator as decent earnings growth always adds to investor optimism.
Average 20-day Volume greater than or equal to 100,000: The addition of this metric ensures that shares can be traded easily.
Current Price greater than or equal to $5: This parameter will help in screening stocks that are trading at a minimum price of $5 or higher.
Zacks Rank less than or equal to 2: No screening is complete without the Zacks Rank, which has proven its worth since inception. It is a fundamental truth that stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) have always managed to beat adversities and outperform the market.
Value Score of less than or equal to B: Our research shows that stocks with a Value Score of A or B when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are five of the 11 stocks that passed the screen:
Huntsman Corporation (HUN - Free Report) is among the world's leading global manufacturers of differentiated and commodity chemical products for a variety of industrial and consumer applications. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 42.3% for 2018 and a Value Score of A.
Covenant Transportation Group, Inc. is a truckload carrier that offers just-in-time and other premium transportation services throughout the United States. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 153.6% for 2018 and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
ON Semiconductor Corporation (ON - Free Report) is a supplier of broadband and power management integrated circuits and standard semiconductors used in numerous advanced devices. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 26% for 2018 and a Value Score of A.
Rayonier Advanced Materials Inc. (RYAM - Free Report) operates as a global supplier of cellulose specialties products, a natural polymer for the chemical industry. The stock has an expected year-over-year earnings growth rate of 124.7% for 2018. It currently has a Value Score of A and a Zacks Rank #2.
Aflac Incorporated (AFL - Free Report) provides financial protection to more than 50 million people worldwide. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 19.1% for 2018. It has a Value Score of A.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.
Click here to sign up for a free trial to the Research Wizard today.
Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.
Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
Zacks Restaurant Recommendations: In addition to dining at these special places, you can feast on their stock shares. A Zacks Special Report spotlights 5 recent IPOs to watch plus 2 stocks that offer immediate promise in a booming sector. Download it free »