5 Value Stocks With Alluring EV-to-EBITDA Ratios to Snap Up
The price-to-earnings (P/E) multiple enjoys wide-scale popularity among investors seeking stocks trading at a bargain. In addition to being a widely used tool for screening stocks, P/E is a popular metric for working out the fair market value of a firm. But even this ubiquitously used valuation multiple has a few limitations.
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.
AZZ Inc. AZZ, ZIM Integrated Shipping Services Ltd. ZIM, Brookfield Infrastructure Partners L.P. BIP, EnerSys ENS and American Vanguard Corporation AVD are some stocks with attractive EV-to-EBITDA ratios.
Is EV-to-EBITDA a Better Substitute to P/E?
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, its debt and preferred stock minus cash and cash equivalents.
EBITDA, the other component of the multiple, 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 attractive it is. A low EV-to-EBITDA ratio could signal 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 shortcoming of P/E is that it can’t be used to value a loss-making firm. 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 loss-making but EBITDA-positive companies.
EV-to-EBITDA is also a 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.
However, EV-to-EBITDA is not devoid of shortcomings and alone cannot 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.
A strategy solely based on EV-to-EBITDA might not yield the desired results. However, 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 value stocks.
Screening Criteria
Here are the parameters to screen for value 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 13 stocks that passed the screen:
AZZ is a global provider of metal coating services, welding solutions, specialty electrical equipment and highly engineered services. This Zacks Rank #2 stock has a Value Score of A.
AZZ has an expected year-over-year earnings growth rate of 23.6% for fiscal 2024. The Zacks Consensus Estimate for AZZ’s fiscal 2024 earnings has been revised 4.9% upward over the last 60 days.
ZIM Integrated Shipping is a leading global container liner shipping company. This Zacks Rank #2 stock has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
ZIM has an expected year-over-year earnings growth rate of 141.3% for 2024. The Zacks Consensus Estimate for ZIM’s 2024 earnings has been revised 142.3% upward over the last 60 days.
Brookfield Infrastructure owns and operates high-quality, long-life assets in the utilities, transport, midstream and data businesses in North and South America, Asia Pacific and Europe. This Zacks Rank #2 stock has a Value Score of A.
Brookfield Infrastructure has an expected year-over-year earnings growth rate of 13.6% for 2024. The Zacks Consensus Estimate for BIP’s 2024 earnings has been revised 1.5% upward over the last 60 days.
EnerSys engages in the manufacturing, marketing and distribution of various industrial batteries. This Zacks Rank #2 stock has a Value Score of A.
EnerSys has an expected year-over-year earnings growth rate of 55.4% for fiscal 2024. ENS has surpassed the Zacks Consensus Estimate in each of the trailing four quarters, the average being 9.9%.
American Vanguard is a diversified specialty and agricultural products company. This Zacks Rank #2 stock has a Value Score of B.
American Vanguard has an expected year-over-year earnings growth rate of 173.1% for 2024. The Zacks Consensus Estimate for AVD’s 2024 earnings has been revised 4.4% upward over the last 60 days.
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Brookfield Infrastructure Partners LP (BIP) : Free Stock Analysis Report
AZZ Inc. (AZZ) : Free Stock Analysis Report
American Vanguard Corporation (AVD) : Free Stock Analysis Report
Enersys (ENS) : Free Stock Analysis Report
ZIM Integrated Shipping Services Ltd. (ZIM) : Free Stock Analysis Report
