5 Value Stocks With Impressive 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 to work out the fair market value of a firm. But even this ubiquitously used valuation multiple has a few limitations.
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.
Group 1 Automotive, Inc. GPI, Titan Machinery Inc. TITN, AAR Corp. AIR, Corebridge Financial, Inc. CRBG and CEMEX, S.A.B. de C.V. CX 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 companies making losses but are EBITDA-positive.
EV-to-EBITDA is also a useful tool 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 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 12 stocks that passed the screen:
Group 1 Automotive is one of the leading automotive retailers in the world. GPI, a Zacks Rank #2 stock, has a Value Score of A.
The Zacks Consensus Estimate for Group 1 Automotive’s current-year earnings has been revised 8.4% upward over the past 60 days. GPI’s earnings beat the Zacks Consensus Estimate in each of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 8%, on average.
Titan Machinery operates a network of full-service agricultural and construction equipment dealer locations in North America and Europe. 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.
Titan Machinery has an expected year-over-year earnings growth rate of 9.7% for the current fiscal year. TITN’s earnings beat the Zacks Consensus Estimate in three of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 18.5%, on average.
AAR provides various products and services to the aviation and defense industries worldwide. AIR, a Zacks Rank #2 stock, has a Value Score of A.
AAR has an expected year-over-year earnings growth rate of 21% for the current fiscal. The consensus estimate for AIR’s current fiscal-year earnings has been revised 1.8% upward over the last 60 days.
Corebridge Financial provides retirement solutions and insurance products. This Zacks Rank #2 stock has a Value Score of A.
Corebridge Financial has an expected year-over-year earnings growth rate of 45.6% for the current year. The Zacks Consensus Estimate for CRBG’s current-year earnings has been revised 5.6% upward over the past 60 days.
CEMEX is a global construction materials company. This Zacks Rank #2 stock has a Value Score of A.
CEMEX has an expected year-over-year earnings growth rate of 125% for the current year. The Zacks Consensus Estimate for CX’s current-year earnings has been revised 15.7% upward over the last 60 days.
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Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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Cemex S.A.B. de C.V. (CX) : Free Stock Analysis Report
AAR Corp. (AIR) : Free Stock Analysis Report
Group 1 Automotive, Inc. (GPI) : Free Stock Analysis Report
Titan Machinery Inc. (TITN) : Free Stock Analysis Report
Corebridge Financial, Inc. (CRBG) : Free Stock Analysis Report
