Hit these 5 bargain-priced stocks with exciting EV/EBITDA ratios – February 14, 2022
The price/earnings (P/E) multiple enjoys wide popularity among investors looking for stocks to trade at a bargain price. In addition to being a widely used tool for screening stocks, P/E is a popular metric for determining a company’s fair market value. However, even this ubiquitous valuation multiple has some drawbacks.
While 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 a true picture of a company’s valuation and earning potential, and has a more comprehensive approach to valuation. While the P/E takes into account a company’s share of equity, the EV/EBITDA ratio determines its total value.
Knowledge base home (KBH – free report), Plains GP Holdings, LP (PAGP – free report), GMS inc. (GMS – free report), MarineMax, Inc. (HZO – free report) and Hillenbrand, Inc. (SALVATION – Free Report) are stocks with impressive EV/EBITDA ratios.
EV to EBITDA is a better option, here’s why
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, debt, and preferred stock less cash and cash equivalents. Essentially, it’s the total value of a business.
EBITDA, the other part of the ratio, gives a clearer picture of a company’s profitability because it eliminates non-cash expenses such as depreciation and amortization that reduce net profit. It is also often used as a cash flow indicator.
Just like the P/E, the lower the EV/EBITDA ratio, the more attractive it is. A low EV/EBITDA ratio could signal that a stock is potentially undervalued.
The EV to EBITDA takes into account the debt on a company’s balance sheet, which the P/E ratio does not take into account. For this reason, the EV/EBITDA ratio is generally used to assess potential acquisition targets, as it indicates the amount of debt the acquirer must assume. Stocks with a low EV/EBITDA multiple could be seen as attractive recovery candidates.
Another shortcoming of the P/E is that it cannot be used to value a loss-making company. 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 assess companies that are making losses but are EBITDA positive.
The EV/EBITDA ratio is also a useful tool for measuring the value of highly leveraged and highly amortized companies. Additionally, it can be used to compare companies with different levels of debt.
However, EV-to-EBITDA is not without its limitations and alone cannot conclusively determine a stock’s inherent potential and future performance. The multiple varies from industry to industry and is generally inappropriate when comparing stocks from different industries given their varying capital expenditure needs.
As such, a strategy based solely on the EV/EBITDA ratio might not yield the desired results. But you can combine it with the other major ratios in your stock investing toolkit, such as price-to-book (P/B), P/E, and price-to-sell (P/S) to filter out the discounted shares.
Here are the parameters for filtering discounted stocks:
12 Month EV-to-EBITDA – Most Recent Below Industry Median X: A lower EV/EBITDA ratio represents a cheaper valuation.
P/E using (F1) less than X-Industry Median: This metric filters out stocks that are trading at a discount to their peers.
P/B lower than the X-Industry median: A lower P/B relative to the industry average implies that the stock is undervalued.
P/S lower than the median X-Industry: The lower the P/S ratio, the more attractive the stock, as investors will have to pay a lower 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 industry median X: This metric will help select stocks that have growth rates above the industry median. This is a meaningful indicator, as decent earnings growth always adds to investor optimism.
Average volume over 20 days greater than or equal to 100,000: Adding this metric ensures that stocks can be traded easily.
Current price greater than or equal to $5: This setting will help filter out stocks that are trading at a minimum price of $5 or more.
Zacks rank less than or equal to 2: No selection is complete without the Zacks Ranking, which has been proven since its inception. It’s a fundamental truth that stocks with a Zacks #1 (Strong Buy) or 2 (Buy) ranking have always managed to overcome adversity and outperform the market.
Value score 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 most upside potential.
Here are five of the 10 stocks that have passed the screen:
Knowledge base home is a well-known home builder in the United States. This rank 1 stock from Zacks has a value score of A.
KB Home has an expected year-over-year earnings growth rate of 67.9% for the current fiscal year. The Zacks consensus estimate for KBH’s current-year earnings has been revised up 29.8% in 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 #1 rank stock has a value score of A. You can see the full list of today’s Zacks #1 Rank stocks here.
Plains GP Holdings forecasts a year-over-year earnings growth rate of 351.6% for the current year. The Zacks consensus estimate for PAGP earnings for the current year has been revised up 6.9% in the past 60 days.
Marine Max is a leading retailer of pleasure boats and yachts. This rank 1 stock from Zacks 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-year earnings has been revised up 6.1% over the past 60 days.
GMS is a distributor of wall panel and suspended ceiling systems. This rank 2 action from Zacks has a value score of A.
GMS forecasts a year-over-year profit growth rate of 100.6% for the current fiscal year. GMS’s consensus current-year earnings estimate has been revised up 6.8% in the past 60 days.
Hillenbrand is a diversified industrial company with businesses serving a wide variety of industries around the world. This rank 2 action from Zacks has a value score of A.
Hillenbrand forecasts a year-over-year earnings growth rate of 3.4% for the current fiscal year. The Zacks consensus estimate for HI’s current-year revenue has been revised up 2.8% over the past 60 days.
You can get the rest of the stocks on this list by signing up for your free 2-week trial to Research Assistant now and start using this screen in your own trading. Moreover, you can also create your own strategies and test them before diving into investing.
The research assistant is a great starting point. It’s easy to use. Everything is in plain language. And it’s very intuitive. Start your search assistant trial today. And the next time you’re reading an economic report, open up the research assistant, plug in your findings, and see what gems come out.
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