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Tap These 5 Bargain Stocks With Amazingly Low EV-to-EBITDA Ratios
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Investors generally have a fixation on the price-to-earnings (P/E) multiple while seeking stocks that are trading at a bargain. A widely favored approach by value investors is to chase stocks that have a low P/E ratio. However, even this widely popular valuation metric is not without its pitfalls.
While 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. which solely considers a company’s equity portion, EV-to-EBITDA determines its total value.
Also referred to as the enterprise multiple, EV-to-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.
EBITDA, the other element, gives a better idea of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows.
Just like P/E, 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.
EV-to-EBITDA takes into account the debt on a company’s balance sheet that the P/E ratio does not. Due to this reason, EV-to-EBITDA is generally used to value the potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks boasting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Another key downside of P/E is that it can’t be used to value a loss-making entity. Moreover, a company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, EV-to-EBITDA is difficult to manipulate and can also be used to value companies incurring losses but are EBITDA-positive.
EV-to-EBITDA is also a useful yardstick in evaluating 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.
However, EV-to-EBITDA is not devoid of shortcomings and it alone can’t conclusively determine a stock’s inherent potential and future performance. The multiple varies across industries and is usually not appropriate while comparing stocks in different industries given their diverse capital expenditure requirements.
As such, a strategy solely based on EV-to-EBITDA might not yield the desired results. But you can club it with the other major ratios in your stock-investing toolbox such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen bargain stocks.
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 our five picks out of the 19 stocks that passed the screen:
MarineMax is a leading recreational boat and yacht retailer. This Zacks Rank #1 stock has a Value Score of A.
MarineMax has an expected year-over-year earnings growth rate of 16.2% for the current fiscal year. The Zacks Consensus Estimate for HZO's current fiscal year earnings has been revised 6.1% upward over the last 60 days.
AdvanSix is a manufacturer of nylon 6 resin, chemical intermediates and ammonium sulfate fertilizer. This Zacks Rank #1 stock has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
AdvanSix has an expected earnings growth rate of 30.6% for the current year. The Zacks Consensus Estimate for ASIX's current-year earnings has been revised 25.1% upward over the past 60 days.
USA Truck is engaged in the transportation of general commodity freight in interstate and foreign commerce. This Zacks Rank #1 stock has a Value Score of A.
USA Truck has an expected earnings growth rate of 26.9% for the current year. The Zacks Consensus Estimate for USAK’s current-year earnings has been revised 39.6% upward over the past 60 days.
Greif is a leading global producer of industrial packaging products and services. This Zacks Rank #2 stock has a Value Score of A.
Greif has an expected year-over-year earnings growth rate of 16.9% for the current fiscal year. The Zacks Consensus Estimate for GEF's current fiscal year earnings has been revised 4.9% upward over the past 60 days.
Plains GP Holdings, through its subsidiaries, is involved in the transportation, storage, terminalling, and marketing of crude oil and refined products. This Zacks Rank #2 stock has a Value Score of A.
Plains GP Holdings has an expected year-over-year earnings growth rate of 361.3% for the current year. The Zacks Consensus Estimate for PAGP's current-year earnings has been revised 8.3% upward over the past 60 days.
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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Tap These 5 Bargain Stocks With Amazingly Low EV-to-EBITDA Ratios
Investors generally have a fixation on the price-to-earnings (P/E) multiple while seeking stocks that are trading at a bargain. A widely favored approach by value investors is to chase stocks that have a low P/E ratio. However, even this widely popular valuation metric is not without its pitfalls.
While 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. which solely considers a company’s equity portion, EV-to-EBITDA determines its total value.
MarineMax, Inc. (HZO - Free Report) , AdvanSix Inc. (ASIX - Free Report) , USA Truck, Inc. , Greif, Inc. (GEF - Free Report) and Plains GP Holdings, L.P. (PAGP - Free Report) are some stocks with impressive EV-to-EBITDA ratios.
EV/EBITDA is a Better Approach, Here’s Why
Also referred to as the enterprise multiple, EV-to-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.
EBITDA, the other element, gives a better idea of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows.
Just like P/E, 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.
EV-to-EBITDA takes into account the debt on a company’s balance sheet that the P/E ratio does not. Due to this reason, EV-to-EBITDA is generally used to value the potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks boasting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Another key downside of P/E is that it can’t be used to value a loss-making entity. Moreover, a company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, EV-to-EBITDA is difficult to manipulate and can also be used to value companies incurring losses but are EBITDA-positive.
EV-to-EBITDA is also a useful yardstick in evaluating 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.
However, EV-to-EBITDA is not devoid of shortcomings and it alone can’t conclusively determine a stock’s inherent potential and future performance. The multiple varies across industries and is usually not appropriate while comparing stocks in different industries given their diverse capital expenditure requirements.
As such, a strategy solely based on EV-to-EBITDA might not yield the desired results. But you can club it with the other major ratios in your stock-investing toolbox such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen bargain stocks.
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 our five picks out of the 19 stocks that passed the screen:
MarineMax is a leading recreational boat and yacht retailer. This Zacks Rank #1 stock has a Value Score of A.
MarineMax has an expected year-over-year earnings growth rate of 16.2% for the current fiscal year. The Zacks Consensus Estimate for HZO's current fiscal year earnings has been revised 6.1% upward over the last 60 days.
AdvanSix is a manufacturer of nylon 6 resin, chemical intermediates and ammonium sulfate fertilizer. This Zacks Rank #1 stock has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
AdvanSix has an expected earnings growth rate of 30.6% for the current year. The Zacks Consensus Estimate for ASIX's current-year earnings has been revised 25.1% upward over the past 60 days.
USA Truck is engaged in the transportation of general commodity freight in interstate and foreign commerce. This Zacks Rank #1 stock has a Value Score of A.
USA Truck has an expected earnings growth rate of 26.9% for the current year. The Zacks Consensus Estimate for USAK’s current-year earnings has been revised 39.6% upward over the past 60 days.
Greif is a leading global producer of industrial packaging products and services. This Zacks Rank #2 stock has a Value Score of A.
Greif has an expected year-over-year earnings growth rate of 16.9% for the current fiscal year. The Zacks Consensus Estimate for GEF's current fiscal year earnings has been revised 4.9% upward over the past 60 days.
Plains GP Holdings, through its subsidiaries, is involved in the transportation, storage, terminalling, and marketing of crude oil and refined products. This Zacks Rank #2 stock has a Value Score of A.
Plains GP Holdings has an expected year-over-year earnings growth rate of 361.3% for the current year. The Zacks Consensus Estimate for PAGP's current-year earnings has been revised 8.3% upward over the past 60 days.
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.