For Immediate Release
Chicago, IL – March 2, 2022 – Stocks in this week’s article are Ethan Allen Interiors Inc. ETD, SM Energy Company SM, JAKKS Pacific, Inc. JAKK, ScanSource, Inc. SCSC and Tronox Holdings plc TROX.
5 Value Stocks with Enticing EV-to-EBITDA Ratios to Own Now
The price-to-earnings (P/E) ratio is broadly considered by investors as the yardstick for evaluating the fair market value of a stock. It is preferred by many investors while handpicking stocks trading at attractive prices. But even this universally used valuation multiple is not without its shortcomings.
Although 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.
Ethan Allen Interiors Inc., SM Energy Company, JAKKS Pacific, Inc., ScanSource, Inc. and Tronox Holdings plc are some stocks with alluring 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.
The other component of the multiple, EBITDA, 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.
Typically, the lower the EV-to-EBITDA ratio, the more attractive it is. A low EV-to-EBITDA ratio could be a sign 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 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.
But EV-to-EBITDA has its limitations too. The ratio varies across industries (a high-growth industry typically has a higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries, given their diverse capital requirements.
Therefore, instead of solely 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 outcome.
Here are our five picks out of the 12 stocks that passed the screen:
Ethan Allen Interiors is a leading interior design company and manufacturer and retailer of quality home furnishings. This Zacks Rank #1 stock has a Value Score of A.
Ethan Allen Interiors has an expected earnings growth rate of 38.4% for the current fiscal year. The Zacks Consensus Estimate for ETD's current fiscal-year earnings has been revised 5.8% upward over the past 60 days.
SM Energy is an independent oil and gas company engaged in the exploration, exploitation, development, acquisition and production of natural gas and crude oil in North America. This Zacks Rank #1 stock has a Value Score of A. You can see the complete list of today's Zacks #1 Rank stocks here.
SM Energy has an expected earnings growth rate of 245.9% for the current year. The Zacks Consensus Estimate for SM's current-year earnings has been revised 14.5% upward over the past 60 days.
JAKKS Pacific is a leading designer, manufacturer and marketer of toys and consumer products sold globally. This Zacks Rank #1 stock has a Value Score of B.
JAKKS Pacific has an expected earnings growth rate of 8.5% for the current year. The consensus estimate for JAKK's current-year earnings has been revised 24.9% upward over the past 60 days.
ScanSource serves North America as a value-added distributor of specialty technologies, including automatic identification and point-of-sale products, and business telephone products. This Zacks Rank #2 stock has a Value Score of A.
ScanSource has an expected earnings growth rate of 27% for the current fiscal year. The Zacks Consensus Estimate for SCSC's current fiscal-year earnings has been revised 6.7% upward over the past 60 days.
Tronox is a leading producer of high-quality titanium products, including titanium dioxide pigment. This Zacks Rank #2 stock has a Value Score of A.
Tronox has an expected earnings growth rate of 31% for the current year. The consensus estimate for TROX's current-year earnings has been revised 7.1% upward over the past 60 days.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/1875060/5-value-stocks-with-enticing-ev-to-ebitda-ratios-to-own-now
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