Advertisement
New Zealand markets close in 3 hours 31 minutes
  • NZX 50

    11,743.98
    -39.41 (-0.33%)
     
  • NZD/USD

    0.6129
    +0.0006 (+0.09%)
     
  • NZD/EUR

    0.5646
    +0.0008 (+0.14%)
     
  • ALL ORDS

    8,043.30
    +44.10 (+0.55%)
     
  • ASX 200

    7,773.20
    +45.60 (+0.59%)
     
  • OIL

    77.82
    +0.10 (+0.13%)
     
  • GOLD

    2,339.40
    +4.90 (+0.21%)
     
  • NASDAQ

    18,808.35
    +184.95 (+0.99%)
     
  • FTSE

    8,317.59
    -21.64 (-0.26%)
     
  • Dow Jones

    39,069.59
    +4.29 (+0.01%)
     
  • DAX

    18,693.37
    +2.07 (+0.01%)
     
  • Hang Seng

    18,608.94
    0.00 (0.00%)
     
  • NIKKEI 225

    38,693.32
    +47.21 (+0.12%)
     
  • NZD/JPY

    96.0450
    -0.0410 (-0.04%)
     

5 Value Stocks With Exciting EV-to-EBITDA Ratios to Snap Up

The price-to-earnings (P/E) multiple enjoys wide-scale popularity among investors seeking stocks trading at a bargain. In addition to being a widely used tool for screening stocks, P/E is a popular metric for working out the fair market value of a firm. But even this ubiquitously used valuation multiple has a few limitations.

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, American Vanguard Corporation AVD, Navios Maritime Partners L.P. NMM, Signet Jewelers Limited SIG and Portland General Electric Company POR are some stocks with attractive 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.

EBITDA, the other component 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.  

EV-to-EBITDA takes into account the debt on a company’s balance sheet that the P/E ratio does not. Due to this reason, EV-to-EBITDA is generally used to value the potential acquisition targets as it shows the amount of debt the acquirer has to assume. Stocks boasting 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 loss-making but EBITDA-positive companies.

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.

A strategy solely based on EV-to-EBITDA might not yield the desired results. However, you can club it with the other major ratios in your stock-investing toolbox, such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen value stocks.

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 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 eight 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 fiscal 2024 earnings has been revised 5.5% upward over the last 60 days. KBH’s earnings beat the Zacks Consensus Estimate in each of the last four quarters at an average of roughly 26.1%.

American Vanguard is a diversified specialty and agricultural products company. This Zacks Rank #2 stock has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

American Vanguard has an expected year-over-year earnings growth rate of 196.2% for 2024. The Zacks Consensus Estimate for AVD’s 2024 earnings has been revised 8.5% upward over the past 60 days.

Navios Maritime Partners is an international owner and operator of dry cargo vessels. This Zacks Rank #2 stock has a Value Score of A.

Navios Maritime Partners has an expected earnings growth rate of 15.9% for 2024. The Zacks Consensus Estimate for NMM’s 2024 earnings has been revised 21.8% upward over the past 60 days.

Signet Jewelers is the world's largest retailer of diamond jewelry. This Zacks Rank #2 stock has a Value Score of A.

Signet Jewelers has an expected earnings growth rate of 2.2% for fiscal 2025. The consensus estimate for SIG’s fiscal 2025 earnings has been revised 3.6% upward over the past 60 days.

Portland General Electric is a vertically integrated electric utility that is engaged in the generation, wholesale purchase and sale, transmission, distribution and retail sale of electricity to customers in in Oregon. This Zacks Rank #2 stock has a Value Score of B.

Portland General Electric has an expected earnings growth rate of 29% for 2024. The Zacks Consensus Estimate for POR’s 2024 earnings has been revised 0.3% upward over the past 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.

The Research Wizard is a great place to begin. It's easy to use. Everything is in plain language. And it's very intuitive. Start your Research Wizard trial today. And the next time you read an economic report, open up the Research Wizard, plug your finds in, and see what gems come out.

Click here to sign up for a free trial to the Research Wizard today.

Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material. An affiliated investment advisory firm may own or have sold short securities and/or hold long and/or short positions in options that are mentioned in this material.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

ADVERTISEMENT

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Signet Jewelers Limited (SIG) : Free Stock Analysis Report

Portland General Electric Company (POR) : Free Stock Analysis Report

KB Home (KBH) : Free Stock Analysis Report

American Vanguard Corporation (AVD) : Free Stock Analysis Report

Navios Maritime Partners LP (NMM) : Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research