Tap These 5 Bargain Stocks With Impressive EV-to-EBITDA Ratios
Price-to-earnings (P/E), given its inherent simplicity, is the most commonly used metric in the value investing world. It is preferred by many investors while handpicking stocks trading at a bargain. However, even this straightforward, broadly used valuation metric has a few downsides.
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.
KB Home KBH, Ingredion Incorporated INGR, DXP Enterprises, Inc. DXPE, Motorcar Parts of America, Inc. MPAA and CEMEX, S.A.B. de C.V. CX are some stocks with attractive EV-to-EBITDA ratios.
What Makes EV-to-EBITDA a Better Alternative?
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 in 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.
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.
Therefore, 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 11 stocks that passed the screen:
KB Home is one of the largest and most recognized homebuilders in the United States. This Zacks Rank #1 stock has a Value Score of A.
The Zacks Consensus Estimate for KB Home’s current fiscal earnings has been revised 22.4% upward over the last 60 days. KBH’s earnings beat the Zacks Consensus Estimate in three of the last four quarters. It has a trailing four-quarter earnings surprise of roughly 20.7%, on average.
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.
DXP Enterprises provides innovative pumping solutions, supply-chain services as well as maintenance, repair, operating and production services. This Zacks Rank #1 stock has a Value Score of B.
DXP Enterprises has an expected year-over-year earnings growth rate of 44.2% for the current year. The consensus estimate for DXPE’s current-year earnings has been revised 52.2% upward over the last 60 days.
Motorcar Parts of America is a remanufacturer, manufacturer and distributor of automotive aftermarket parts. This Zacks Rank #2 stock has a Value Score of A.
Motorcar Parts of America has an expected year-over-year earnings growth rate of 68.8% for the current fiscal year. The Zacks Consensus Estimate for MPAA's current fiscal earnings has been revised 6.9% 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 88.9% for the current year. The Zacks Consensus Estimate for CX’s current-year earnings has been revised 6.3% upward over the last 60 days.
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Cemex S.A.B. de C.V. (CX) : Free Stock Analysis Report
KB Home (KBH) : Free Stock Analysis Report
DXP Enterprises, Inc. (DXPE) : Free Stock Analysis Report
Ingredion Incorporated (INGR) : Free Stock Analysis Report
Motorcar Parts of America, Inc. (MPAA) : Free Stock Analysis Report
