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Tap These 5 Bargain Stocks With Attractive EV-to-EBITDA Ratio
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Investors typically are fixated on the price-to-earnings (P/E) strategy while seeking stocks trading at attractive prices. This straightforward, 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.
While P/E enjoys great popularity among value investors, a less-used and more complicated metric called EV-to-EBITDA is sometimes viewed as a better alternative. EV-to-EBITDA gives the true picture of a company’s valuation and earnings potential. It has a more comprehensive approach to valuation.
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, gives a clearer picture of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that dampen net earnings. It is also often used as a proxy for cash flows.
Typically, 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 the P/E ratio, EV-to-EBITDA takes debt on a company’s balance sheet into account. For this reason, it is typically used to value acquisition targets. The ratio shows the amount of debt that the acquirer has to bear. Stocks flaunting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Moreover, P/E can’t be used to value a loss-making firm. A firm’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is harder to manipulate and can be used to value companies that have negative net earnings but are positive on the EBITDA front.
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.
But EV-to-EBITDA has its limitations, too. The ratio varies across industries (a high-growth industry typically has a higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries, given their diverse capital requirements.
Thus, instead of just relying on EV-to-EBITDA, you can club it with the other major ratios, such as price-to-book (P/B), P/E and price-to-sales (P/S), to achieve the desired results.
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 50,000: 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 nine stocks that passed the screen:
KT is the biggest telecommunications operator in the Republic of Korea. This Zacks Rank #1 stock has a Value Score of A.
KT has an expected earnings growth rate of 9.4% for 2024. The Zacks Consensus Estimate for KT's 2024 earnings has been revised 5.6% upward over the past 60 days.
Park Hotels & Resorts is a leading publicly-traded lodging REIT with a diverse portfolio of iconic and market-leading hotels and resorts. 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.
Park Hotels & Resorts has an expected year-over-year earnings growth rate of 4.9% for 2024. The consensus estimate for PK's 2024 earnings has been revised upward by 7.6% over the past 60 days.
Cenovus Energy is a leading integrated energy firm. Its operations comprise marketing produced oil, natural gas and natural gas liquids. This Zacks Rank #1 stock has a Value Score of A.
Cenovus Energy has an expected year-over-year earnings growth rate of 40.1% for 2024. The Zacks Consensus Estimate for CVE's 2024 earnings has been revised 11.8% upward over the past 60 days.
First Horizon provides diversified financial services, mainly via its principal subsidiary First Horizon Bank. This Zacks Rank #2 stock has a Value Score of A.
The consensus estimate for First Horizon’s 2024 earnings has been revised 1.5% upward over the last 60 days. FHN beat the Zacks Consensus Estimate for earnings in three of the last four quarters while matching the same on the other occasion. It has a trailing four-quarter negative earnings surprise of around 3.2%, on average.
Noah Holdings is a leading wealth management service provider in China. NOAH, a Zacks Rank #2 stock, has a Value Score of B.
Noah Holdings has an expected year-over-year earnings growth rate of 17.6% for 2024. The consensus estimate for NOAH’s 2024 earnings has been revised 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 These 5 Bargain Stocks With Attractive EV-to-EBITDA Ratio
Investors typically are fixated on the price-to-earnings (P/E) strategy while seeking stocks trading at attractive prices. This straightforward, 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.
While P/E enjoys great popularity among value investors, a less-used and more complicated metric called EV-to-EBITDA is sometimes viewed as a better alternative. EV-to-EBITDA gives the true picture of a company’s valuation and earnings potential. It has a more comprehensive approach to valuation.
KT Corporation (KT - Free Report) , Park Hotels & Resorts Inc. (PK - Free Report) , Cenovus Energy Inc. (CVE - Free Report) , First Horizon Corporation (FHN - Free Report) and Noah Holdings Limited (NOAH - Free Report) are some stocks with attractive EV-to-EBITDA ratios.
Here’s Why EV-to-EBITDA is a Better Option
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, gives a clearer picture of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that dampen net earnings. It is also often used as a proxy for cash flows.
Typically, 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 the P/E ratio, EV-to-EBITDA takes debt on a company’s balance sheet into account. For this reason, it is typically used to value acquisition targets. The ratio shows the amount of debt that the acquirer has to bear. Stocks flaunting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Moreover, P/E can’t be used to value a loss-making firm. A firm’s earnings are also subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is harder to manipulate and can be used to value companies that have negative net earnings but are positive on the EBITDA front.
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.
But EV-to-EBITDA has its limitations, too. The ratio varies across industries (a high-growth industry typically has a higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries, given their diverse capital requirements.
Thus, instead of just relying on EV-to-EBITDA, you can club it with the other major ratios, such as price-to-book (P/B), P/E and price-to-sales (P/S), to achieve the desired results.
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 50,000: 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 nine stocks that passed the screen:
KT is the biggest telecommunications operator in the Republic of Korea. This Zacks Rank #1 stock has a Value Score of A.
KT has an expected earnings growth rate of 9.4% for 2024. The Zacks Consensus Estimate for KT's 2024 earnings has been revised 5.6% upward over the past 60 days.
Park Hotels & Resorts is a leading publicly-traded lodging REIT with a diverse portfolio of iconic and market-leading hotels and resorts. 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.
Park Hotels & Resorts has an expected year-over-year earnings growth rate of 4.9% for 2024. The consensus estimate for PK's 2024 earnings has been revised upward by 7.6% over the past 60 days.
Cenovus Energy is a leading integrated energy firm. Its operations comprise marketing produced oil, natural gas and natural gas liquids. This Zacks Rank #1 stock has a Value Score of A.
Cenovus Energy has an expected year-over-year earnings growth rate of 40.1% for 2024. The Zacks Consensus Estimate for CVE's 2024 earnings has been revised 11.8% upward over the past 60 days.
First Horizon provides diversified financial services, mainly via its principal subsidiary First Horizon Bank. This Zacks Rank #2 stock has a Value Score of A.
The consensus estimate for First Horizon’s 2024 earnings has been revised 1.5% upward over the last 60 days. FHN beat the Zacks Consensus Estimate for earnings in three of the last four quarters while matching the same on the other occasion. It has a trailing four-quarter negative earnings surprise of around 3.2%, on average.
Noah Holdings is a leading wealth management service provider in China. NOAH, a Zacks Rank #2 stock, has a Value Score of B.
Noah Holdings has an expected year-over-year earnings growth rate of 17.6% for 2024. The consensus estimate for NOAH’s 2024 earnings has been revised 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.