Yahoo Finance Pick These 5 Bargain Stocks With Impressive EV/EBITDA Ratios
Investors typically have a fixation on the price-to-earnings (P/E) strategy while seeking stocks trading at attractive prices. This straight-forward, easy-to-calculate ratio is the most preferred among all the valuation metrics in the investment toolkit for working out the fair market value of a stock. But even this ubiquitously used valuation metric is not without its pitfalls.
While 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.
Compania Cervecerias Unidas S.A. CCU, Centrais Eletricas Brasileiras S.A. EBR, Cumulus Media Inc. CMLS, Dun & Bradstreet Holdings, Inc. DNB and Noah Holdings Limited NOAH are some stocks with attractive EV-to-EBITDA ratios.
EV-to-EBITDA is a Better Substitute, 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 P/E ratio, EV-to-EBITDA takes debt on a company’s balance sheet into account. Due to this reason, EV-to-EBITDA is generally used to value potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks flaunting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Another shortcoming of P/E is that it can’t be used to value a loss-making firm. A company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, EV-to-EBITDA is difficult to manipulate and can also be used to value companies making losses but are EBITDA positive.
EV-to-EBITDA is also a useful yardstick 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 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 nine stocks that passed the screen:
Compania Cervecerias Unidas is a multinational beverage company with diversified businesses and operations. This Zacks Rank #1 stock has a Value Score of B.
Compania Cervecerias Unidas has an expected year-over-year earnings growth rate of 37.8% for 2023. The Zacks Consensus Estimate for CCU’s 2023 earnings has been revised 13.3% upward over the last 60 days.
Centrais Eletricas Brasileiras engages in the generation, transmission, and distribution of electricity in Brazil. 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.
Centrais Eletricas Brasileiras has an expected year-over-year earnings growth rate of 13.9% for 2023. The Zacks Consensus Estimate for EBR’s 2023 earnings has been revised 4.3% upward over the last 60 days.
Cumulus Media is an audio-first media company that owns and operates radio stations, which provide local programs, music, sports, entertainment, news and advertising solutions. This Zacks Rank #2 stock has a Value Score of A.
Cumulus Media beat the Zacks Consensus Estimate for earnings in two of the last four quarters. The consensus estimate for CMLS’ 2023 earnings has been stable over the past 60 days.
Dun & Bradstreet is a leading provider of business decisioning data and analytics. This Zacks Rank #2 stock has a Value Score of B.
Dun & Bradstreet has an expected earnings growth rate of 4.5% for 2023. The consensus estimate for DNB’s 2023 earnings has been revised 0.9% upward over the past 60 days.
Noah Holdings is a leading wealth management service provider in China. NOAH, a Zacks Rank #2 stock, has a Value Score of B.
Noah Holdings has an expected year-over-year earnings growth rate of 10.7% for 2023. The Zacks Consensus Estimate for NOAH’s 2023 earnings has been revised 2.8% upward over the last 60 days.
You can get the rest of the stocks on this list by signing up now for your 2-week free trial to the Research Wizard and start using this screen in your own trading. Further, you can also create your own strategies and test them first before taking the investment plunge.
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Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.
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Dun & Bradstreet Holdings, Inc. (DNB) : Free Stock Analysis Report
Cumulus Media, Inc. (CMLS) : Free Stock Analysis Report
Compania Cervecerias Unidas, S.A. (CCU) : Free Stock Analysis Report
Noah Holdings Ltd. (NOAH) : Free Stock Analysis Report
Centrais El?tricas Brasileiras SA (EBR) : Free Stock Analysis Report
