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Tap 5 Bargain Stocks With Incredibly Low EV/EBITDA Ratios
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Investors generally have a fixation on the price-to-earnings (P/E) strategy while seeking stocks trading at attractive prices. This straight-forward, easy-to-calculate ratio is the most preferred among all the valuation metrics in the investment toolkit for working out the fair market value of a stock. But even this ubiquitously used valuation metric is not without its pitfalls.
Although P/E is the most popular valuation metric, a more complicated multiple called EV-to-EBITDA works even better. Often considered a better alternative to P/E, it gives the true picture of a company’s valuation and earnings potential, and has a more complete approach to valuation. While P/E considers a firm’s equity portion, EV-to-EBITDA determines its total value.
Covenant Logistics Group, Inc. (CVLG - Free Report) , TravelCenters of America Inc. , SpartanNash Company (SPTN - Free Report) , Greif, Inc. (GEF - Free Report) and Patrick Industries, Inc. (PATK - Free Report) are some stocks with attractive EV-to-EBITDA ratios.
EV-to-EBITDA is a Better Substitute, Here’s Why
Also referred to as 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. In essence, it is the entire value of a company.
EBITDA, the other element of the ratio, gives a clearer picture of a company’s profitability as it strips out non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows.
Generally, the lower the EV-to-EBITDA ratio, the more enticing it is. A low EV-to-EBITDA ratio could indicate that a stock is potentially undervalued.
Unlike P/E ratio, EV-to-EBITDA takes debt on a company’s balance sheet into account. Due to this reason, EV-to-EBITDA is generally used to value potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks flaunting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Another major drawback of P/E is that it can’t 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 less amenable to manipulation and can also be used to value companies that are making loss but are EBITDA-positive.
EV-to-EBITDA is also a useful tool for 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 also not without its shortcomings and alone cannot conclusively determine a stock’s inherent potential and future performance. The ratio varies across industries and is generally not appropriate while comparing stocks in different industries, given their diverse capital spending requirements.
Hence, a strategy entirely based on EV-to-EBITDA might not yield the desired results. But you can club it with other major ratios 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 16 stocks that passed the screen:
Covenant Logistics, together with its subsidiaries, offers a portfolio of transportation and logistics services. CVLG, a Zacks Rank #1 stock, has a Value Score of A.
Covenant Logistics has an expected year-over-year earnings growth rate of 50.4% for the current year. The Zacks Consensus Estimate for CVLG's current-year earnings has been revised 18.6% upward over the last 60 days.
TravelCenters of America is the largest publicly traded full-service travel center network in the United States. TA, flaunting a Zacks Rank #1, has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
TravelCenters of America has an expected year-over-year earnings growth of 83.9% for the current year. The consensus estimate for TA’s current-year earnings has been revised 113.6% upward over the last 60 days.
SpartanNash distributes grocery products to a diverse group of independent and chain retailers, its corporate-owned retail stores, and U.S. military commissaries and exchanges. This Zacks Rank #2 stock has a Value Score of A.
SpartanNash has an expected earnings growth rate of 36.5% for the current year. The Zacks Consensus Estimate for SPTN's current-year earnings has been revised 0.9% 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 36.8% for the current fiscal year. The Zacks Consensus Estimate for GEF's current fiscal-year earnings has been revised 0.4% upward over the past 60 days.
Patrick Industries is a leading component solutions provider for the recreational vehicle, marine and manufactured housing industries. This Zacks Rank #2 stock has a Value Score of A.
Patrick Industries has an expected year-over-year earnings growth rate of 36.6% for the current year. The Zacks Consensus Estimate for PATK’s current-year earnings has been revised 1.2% 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 5 Bargain Stocks With Incredibly Low EV/EBITDA Ratios
Investors generally have a fixation on the price-to-earnings (P/E) strategy while seeking stocks trading at attractive prices. This straight-forward, easy-to-calculate ratio is the most preferred among all the valuation metrics in the investment toolkit for working out the fair market value of a stock. But even this ubiquitously used valuation metric is not without its pitfalls.
Although P/E is the most popular valuation metric, a more complicated multiple called EV-to-EBITDA works even better. Often considered a better alternative to P/E, it gives the true picture of a company’s valuation and earnings potential, and has a more complete approach to valuation. While P/E considers a firm’s equity portion, EV-to-EBITDA determines its total value.
Covenant Logistics Group, Inc. (CVLG - Free Report) , TravelCenters of America Inc. , SpartanNash Company (SPTN - Free Report) , Greif, Inc. (GEF - Free Report) and Patrick Industries, Inc. (PATK - Free Report) are some stocks with attractive EV-to-EBITDA ratios.
EV-to-EBITDA is a Better Substitute, Here’s Why
Also referred to as 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. In essence, it is the entire value of a company.
EBITDA, the other element of the ratio, gives a clearer picture of a company’s profitability as it strips out non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows.
Generally, the lower the EV-to-EBITDA ratio, the more enticing it is. A low EV-to-EBITDA ratio could indicate that a stock is potentially undervalued.
Unlike P/E ratio, EV-to-EBITDA takes debt on a company’s balance sheet into account. Due to this reason, EV-to-EBITDA is generally used to value potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks flaunting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Another major drawback of P/E is that it can’t 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 less amenable to manipulation and can also be used to value companies that are making loss but are EBITDA-positive.
EV-to-EBITDA is also a useful tool for 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 also not without its shortcomings and alone cannot conclusively determine a stock’s inherent potential and future performance. The ratio varies across industries and is generally not appropriate while comparing stocks in different industries, given their diverse capital spending requirements.
Hence, a strategy entirely based on EV-to-EBITDA might not yield the desired results. But you can club it with other major ratios 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 16 stocks that passed the screen:
Covenant Logistics, together with its subsidiaries, offers a portfolio of transportation and logistics services. CVLG, a Zacks Rank #1 stock, has a Value Score of A.
Covenant Logistics has an expected year-over-year earnings growth rate of 50.4% for the current year. The Zacks Consensus Estimate for CVLG's current-year earnings has been revised 18.6% upward over the last 60 days.
TravelCenters of America is the largest publicly traded full-service travel center network in the United States. TA, flaunting a Zacks Rank #1, has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
TravelCenters of America has an expected year-over-year earnings growth of 83.9% for the current year. The consensus estimate for TA’s current-year earnings has been revised 113.6% upward over the last 60 days.
SpartanNash distributes grocery products to a diverse group of independent and chain retailers, its corporate-owned retail stores, and U.S. military commissaries and exchanges. This Zacks Rank #2 stock has a Value Score of A.
SpartanNash has an expected earnings growth rate of 36.5% for the current year. The Zacks Consensus Estimate for SPTN's current-year earnings has been revised 0.9% 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 36.8% for the current fiscal year. The Zacks Consensus Estimate for GEF's current fiscal-year earnings has been revised 0.4% upward over the past 60 days.
Patrick Industries is a leading component solutions provider for the recreational vehicle, marine and manufactured housing industries. This Zacks Rank #2 stock has a Value Score of A.
Patrick Industries has an expected year-over-year earnings growth rate of 36.6% for the current year. The Zacks Consensus Estimate for PATK’s current-year earnings has been revised 1.2% 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.