Yahoo Finance 5 Stocks With Impressive EV-to-EBITDA Ratios to Scoop Up
The price-to-earnings (P/E) ratio is broadly considered 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. However, even this universally used valuation multiple is not without its limitations.
While P/E enjoys huge 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.
Global Partners LP GLP, China Automotive Systems, Inc. CAAS, Sterling Infrastructure, Inc. STRL, Group 1 Automotive, Inc. GPI and NRG Energy, Inc. NRG are some stocks with attractive EV-to-EBITDA ratios.
EV-to-EBITDA is a Better Option, Here’s Why
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 element 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.
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 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 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 13 stocks that passed the screen:
Global Partners is focused on the distribution of gasoline, distillates, residual oil and renewable fuels, apart from owning several refined-petroleum-product terminals. GLP, a Zacks Rank #1 stock, has a Value Score of A.
Global Partners has an expected year-over-year earnings growth rate of 654.2% for the current year. The Zacks Consensus Estimate for the current year for GLP has been revised 37.8% upward over the last 60 days.
China Automotive Systems is a leading supplier of power steering components and systems in China. CAAS, flaunting a Zacks Rank #1, has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.
China Automotive Systems has expected year-over-year earnings growth of 72.2% for the current year. The consensus estimate for CAAS’s current-year earnings has been revised 55% upward over the last 60 days.
Sterling Infrastructure specializes in transportation, e-infrastructure and building solutions. This Zacks Rank #2 stock has a Value Score of A.
Sterling Infrastructure has an expected earnings growth rate of 47.4% for the current year. The Zacks Consensus Estimate for STRL’s current-year earnings has been revised 4.3% upward over the past 60 days.
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.
Group 1 Automotive has an expected earnings growth rate of 32.8% for the current year. The consensus estimate for GPI’s current-year earnings has been revised 2.6% upward over the past 60 days.
NRG Energy is engaged in the production, sale and delivery of energy and energy products and services to residential, industrial as well as commercial consumers. This Zacks Rank #2 stock has a Value Score of A.
NRG Energy has expected year-over-year earnings growth of 46.4% for the current year. The Zacks Consensus Estimate for NRG’s current-year earnings has been revised 21% upward over the last 60 days.
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NRG Energy, Inc. (NRG) : Free Stock Analysis Report
Group 1 Automotive, Inc. (GPI) : Free Stock Analysis Report
Global Partners LP (GLP) : Free Stock Analysis Report
Sterling Infrastructure, Inc. (STRL) : Free Stock Analysis Report
China Automotive Systems, Inc. (CAAS) : Free Stock Analysis Report
