Yahoo Finance Pick These 5 Bargain Stocks With Alluring 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.
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.
M/I Homes, Inc. MHO, DNOW Inc. DNOW, Fortuna Silver Mines Inc. FSM, The ODP Corporation ODP and AAR Corp. AIR are some stocks with attractive 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 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 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.
As such, 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 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 14 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 B.
M/I Homes has an expected year-over-year earnings growth rate of 12.2% for 2024. The Zacks Consensus Estimate for MHO’s 2024 earnings has been revised 11.2% upward over the last 60 days.
DNOW is a supplier of energy and industrial products and packaged, engineered process and production equipment. 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.
DNOW has an expected earnings growth rate of 9.3% for 2024. The consensus estimate for DNOW’s 2024 earnings has been revised 3.9% upward over the past 60 days.
Fortuna Silver Mines is engaged in the exploration, mining and development of silver and base metal properties. This Zacks Rank #2 stock has a Value Score of A.
Fortuna Silver Mines has an expected earnings growth rate of 68.2% for 2024. The consensus estimate for FSM’s 2024 earnings has been revised 132.4% upward over the past 60 days.
ODP is one of the leading providers of business services and supplies, products and technology solutions to small, medium and enterprise businesses. This Zacks Rank #2 stock has a Value Score of A.
ODP has an expected year-over-year earnings growth rate of 7.7% for 2024. The Zacks Consensus Estimate for the company’s 2024 earnings has been revised 5.6% upward over the past 60 days.
AAR provides various products and services to the aviation and defense industries worldwide. AIR, a Zacks Rank #2 stock, has a Value Score of B.
AAR has an expected year-over-year earnings growth rate of 15.4% for the current fiscal year. AIR beat the Zacks Consensus Estimate in three of the last four quarters while matching it once, with the average earnings surprise being roughly 4%.
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The ODP Corporation (ODP) : Free Stock Analysis Report
AAR Corp. (AIR) : Free Stock Analysis Report
M/I Homes, Inc. (MHO) : Free Stock Analysis Report
Fortuna Silver Mines Inc. (FSM) : Free Stock Analysis Report
DNOW Inc. (DNOW) : Free Stock Analysis Report
