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Pick These 5 Bargain Stocks With Alluring EV-to-EBITDA Ratios
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Price-to-earnings (P/E), due to its apparent simplicity, is the most commonly used metric in the value investing world. It is preferred by many investors to handpick stocks trading at a bargain. However, even this straightforward, broadly used valuation metric suffers a few downsides.
What Makes EV-to-EBITDA a Better Option?
Although P/E is hands down the most widely used equity valuation ratio in the market, a relatively less used metric called EV-to-EBITDA is often viewed as a better option as it offers a clearer picture of a company’s valuation and earnings potential. Unlike P/E that solely considers a company’s equity portion, EV-to-EBITDA determines its total value.
EV-to-EBITDA is essentially 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, 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 reduce net earnings.
Typically, the lower the EV-to-EBITDA ratio, the more appealing it is. A low EV-to-EBITDA ratio could be a sign that a stock is potentially undervalued.
However, unlike P/E ratio, EV-to-EBITDA takes into account the debt on a company’s balance sheet. For this reason, EV-to-EBITDA is usually used to value possible acquisition targets. Stocks with a low EV-to-EBITDA multiple could be seen as potential takeover candidates.
Another key drawback of P/E is that it cannot be used to value a loss-making entity. A firm’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is harder to manipulate and can also be used to value companies that have negative net earnings but are positive on the EBITDA front.
EV-to-EBITDA is also a useful yardstick in measuring the value of firms that are highly leveraged and have a high degree of depreciation. Moreover, it can be used to compare companies with different levels of debt.
But EV-to-EBITDA has its limitations too. The ratio varies across industries (a high-growth industry typically has higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries given their diverse capital requirements.
Hence, instead of just relying on EV-to-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 bargain stocks:
EV-to-EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV-to-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 21 stocks that passed the screen:
The ODP Corporation (ODP - Free Report) is one of the leading providers of business services and supplies, products and technology solutions to small, medium and enterprise businesses. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 11% for the current year and a Value Score of A.
Laboratory Corporation of America Holdings (LH - Free Report) is a leading healthcare diagnostics company. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 80.3% for the current year and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Boise Cascade Company (BCC - Free Report) operates as a wood products manufacturer and building materials distributor. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 143.5% for the current year and a Value Score of A.
Koppers Holdings Inc. (KOP - Free Report) is a global provider of wood treatment chemicals, treated wood products and carbon compounds. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 16% for the current year and a Value Score of A.
Greif, Inc. (GEF - Free Report) is a leading global producer of industrial packaging products and services. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 12.1% for the current fiscal year and 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.
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Pick These 5 Bargain Stocks With Alluring EV-to-EBITDA Ratios
Price-to-earnings (P/E), due to its apparent simplicity, is the most commonly used metric in the value investing world. It is preferred by many investors to handpick stocks trading at a bargain. However, even this straightforward, broadly used valuation metric suffers a few downsides.
What Makes EV-to-EBITDA a Better Option?
Although P/E is hands down the most widely used equity valuation ratio in the market, a relatively less used metric called EV-to-EBITDA is often viewed as a better option as it offers a clearer picture of a company’s valuation and earnings potential. Unlike P/E that solely considers a company’s equity portion, EV-to-EBITDA determines its total value.
EV-to-EBITDA is essentially 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, 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 reduce net earnings.
Typically, the lower the EV-to-EBITDA ratio, the more appealing it is. A low EV-to-EBITDA ratio could be a sign that a stock is potentially undervalued.
However, unlike P/E ratio, EV-to-EBITDA takes into account the debt on a company’s balance sheet. For this reason, EV-to-EBITDA is usually used to value possible acquisition targets. Stocks with a low EV-to-EBITDA multiple could be seen as potential takeover candidates.
Another key drawback of P/E is that it cannot be used to value a loss-making entity. A firm’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is harder to manipulate and can also be used to value companies that have negative net earnings but are positive on the EBITDA front.
EV-to-EBITDA is also a useful yardstick in measuring the value of firms that are highly leveraged and have a high degree of depreciation. Moreover, it can be used to compare companies with different levels of debt.
But EV-to-EBITDA has its limitations too. The ratio varies across industries (a high-growth industry typically has higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries given their diverse capital requirements.
Hence, instead of just relying on EV-to-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 bargain stocks:
EV-to-EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV-to-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 21 stocks that passed the screen:
The ODP Corporation (ODP - Free Report) is one of the leading providers of business services and supplies, products and technology solutions to small, medium and enterprise businesses. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 11% for the current year and a Value Score of A.
Laboratory Corporation of America Holdings (LH - Free Report) is a leading healthcare diagnostics company. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 80.3% for the current year and a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
Boise Cascade Company (BCC - Free Report) operates as a wood products manufacturer and building materials distributor. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 143.5% for the current year and a Value Score of A.
Koppers Holdings Inc. (KOP - Free Report) is a global provider of wood treatment chemicals, treated wood products and carbon compounds. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 16% for the current year and a Value Score of A.
Greif, Inc. (GEF - Free Report) is a leading global producer of industrial packaging products and services. This Zacks Rank #2 stock has an expected year-over-year earnings growth rate of 12.1% for the current fiscal year and 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.