Value stocks

5 Value Stocks With Alluring EV/EBITDA Ratios To Own Now

Given its apparent simplicity, the price/earnings ratio (P/E) is the most commonly used measure in the world of value investing. The ratio enjoys more popularity among the valuation metrics in the investment toolkit and is preferred while discovering stocks trading at attractive prices. But even this universally used valuation multiple is not without limits.

While P/E enjoys great popularity among value investors, a less used and more complicated metric called EV-to-EBITDA is sometimes seen as a better alternative. The EV/EBITDA ratio gives a true picture of a company’s valuation and earnings potential. It has a more global approach to evaluation.

Greif, Inc. WEF, Berry Global Group, Inc. BERY, DXC Technology Company DXC, The Container Store Group, Inc. TCS and Hillenbrand, Inc. HI are a few stocks with attractive EV/EBITDA ratios.

What makes EV-EBITDA a better option?

EV to EBITDA is basically 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, debt, and preferred stock less cash and cash equivalents.

The other component of the multiple, EBITDA, gives a better idea of ​​a company’s profitability because it removes the impact of non-cash expenses such as depreciation and amortization that reduce net profit. It is also often used as a cash flow indicator.

Generally, the lower the EV/EBITDA ratio, the more attractive it is. A low EV/EBITDA ratio could signal that a stock is potentially undervalued.

Unlike the P/E ratio, EV/EBITDA takes into account the debt on a company’s balance sheet. For this reason, it is generally used to assess potential acquisition targets. The ratio indicates the amount of debt that the acquirer must bear. Stocks with a low EV/EBITDA multiple could be seen as attractive takeover candidates.

Also, the P/E cannot be used to value a loss-making company. A company’s earnings are also subject to accounting estimates and management manipulation. In contrast, the EV/EBITDA ratio is more difficult to manipulate and can be used to assess companies that have negative net income but are positive on the EBITDA front.

The EV/EBITDA ratio is also a useful criterion for measuring the value of highly indebted and highly depreciated companies. Additionally, it can be used to compare companies with different levels of debt.

But EV to EBITDA also has its limits. The ratio varies from industry to industry (a high growth industry usually has a higher multiple and vice versa) and is generally not appropriate when comparing stocks in different industries, given their needs in miscellaneous capital.

Therefore, instead of just relying on EV to EBITDA, you can combine it with the other major ratios such as price per book (P/B), P/E, and price to sales ( P/S) to achieve the desired result.

Selection criteria

Here are the parameters to filter for value stocks:

12 Month EV-to-EBITDA – Most Recent Below Industry Median X: A lower EV/EBITDA ratio represents a cheaper valuation.

P/E using (F1) less than X-Industry Median: This metric filters out stocks that are trading at a discount to their peers.

P/B lower than the X-Industry median: A lower P/B relative to the industry average implies that the stock is undervalued.

P/S lower than the median X-Industry: The lower the P/S ratio, the more attractive the stock, as investors will have to pay a lower 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 industry median X: This metric will help select stocks that have growth rates above the industry median. This is a meaningful indicator, as decent earnings growth always adds to investor optimism.

Average volume over 20 days greater than or equal to 100,000: Adding this metric ensures that stocks can be traded easily.

Current price greater than or equal to $5: This setting will help filter out stocks that are trading at a minimum price of $5 or more.

Zacks rank less than or equal to 2: No selection is complete without the Zacks Ranking, which has been proven since its inception. It’s a fundamental truth that stocks with a Zacks #1 (Strong Buy) or 2 (Buy) ranking have always managed to overcome adversity and outperform the market.

Value score 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 most upside potential.

Here are five of the 18 stocks that have passed the screen:

Greif is one of the world’s leading producers of industrial packaging products and services. This rank 1 stock from Zacks has a value score of A.

Greif forecasts a year-over-year earnings growth rate of 11.4% for the current fiscal year. The Zacks consensus estimate for WEF current-year revenue has been revised up 5.6% in the past 60 days.

Berry Global Group manufactures and distributes specialty non-woven materials, engineered materials and consumer packaging products to market. This Zacks #1 rank stock has a value score of A. You can see the full list of today’s Zacks #1 Rank stocks here.

Berry Global Group forecasts a year-over-year earnings growth rate of 2.8% for the current fiscal year. The Zacks consensus estimate for BERY’s current-year earnings has been revised up 18% in the past 60 days.

DXC Technology offers a wide range of professional services to clients in global, commercial and government markets. DXC, a Zacks Rank #2 stock, has a Value Score of A.

DXC Technology forecasts a year-over-year earnings growth rate of 51.4% for the current fiscal year. The Zacks consensus estimate for DXC’s current-year earnings has been revised up 1.7% over the past 60 days.

The container store group is a leading specialty retailer of storage and organization products and solutions, as well as custom closets. This rank 2 action from Zacks has a value score of A.

The Container Store Group has an expected year-over-year profit growth rate of 25% for the current fiscal year. TCS has beaten the Zacks consensus estimate for earnings in each of the past four quarters, averaging 101.5%.

Hillenbrand is a diversified global industrial company with businesses serving a wide variety of industries around the world. This rank 2 action from Zacks has a value score of A.

Hillenbrand forecasts a year-over-year earnings growth rate of 0.5% for the current fiscal year. The Zacks consensus estimate for HI’s current-year revenue has been revised up 3.8% over the past 60 days.

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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 the options mentioned herein. An affiliated investment adviser may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.

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Container Store The (TCS): Free Stock Analysis Report

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