Pick These 5 Bargain Stocks With Attractive EV-to-EBITDA Ratios
The price-to-earnings (P/E) ratio is broadly considered the yardstick for evaluating the fair market value of a stock. It is preferred by many investors while handpicking stocks trading at a bargain. However, even this universally used valuation multiple is not without its 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.
M/I Homes, Inc. MHO, Ingredion Incorporated INGR, Guess', Inc. GES, Brookfield Infrastructure Partners L.P. BIP and Playa Hotels & Resorts N.V. PLYA are some stocks with impressive EV-to-EBITDA ratios.
EV-to-EBITDA is a Better Option, 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 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 potential 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 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 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 10 stocks that passed the screen:
M/I Homes is one of the leading builders of single-family homes. This Zacks Rank #1 stock has a Value Score of A.
The Zacks Consensus Estimate for M/I Homes’ current-year earnings has been revised 11.5% upward over the last 60 days. MHO’s earnings beat the Zacks Consensus Estimate in each of the last four quarters at an average of around 30%.
Ingredion is an ingredients solutions provider specializing in nature-based sweeteners, starches and nutrition ingredients. This Zacks Rank #1 stock has a Value Score of B. You can see the complete list of today’s Zacks #1 Rank stocks here.
Ingredion has an expected year-over-year earnings growth rate of 22.2% for the current year. The Zacks Consensus Estimate for INGR’s current-year earnings has been revised 9.4% upward over the last 60 days.
Guess' designs, markets, distributes and licenses casual apparel and accessories for men, women and children. This Zacks Rank #2 stock has a Value Score of A.
Guess' has an expected year-over-year earnings growth rate of 2.6% for the current fiscal year. The Zacks Consensus Estimate for GES’s current fiscal-year earnings has been revised 5.6% 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 13.3% for the current year. The Zacks Consensus Estimate for BIP’s current-year earnings has been revised 2% upward over the last 60 days.
Playa Hotels & Resorts is an owner, operator and developer of resorts primarily in Mexico and the Caribbean. This Zacks Rank #2 stock has a Value Score of B.
Playa Hotels & Resorts has an expected year-over-year earnings growth rate of 18% for the current year. The Zacks Consensus Estimate for PLYA’s current-year earnings has been revised 5.4% upward over the last 60 days.
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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.
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Brookfield Infrastructure Partners LP (BIP) : Free Stock Analysis Report
Guess?, Inc. (GES) : Free Stock Analysis Report
Ingredion Incorporated (INGR) : Free Stock Analysis Report
M/I Homes, Inc. (MHO) : Free Stock Analysis Report
Playa Hotels & Resorts N.V. (PLYA) : Free Stock Analysis Report
