Value stocks

5 Value Stocks with Attractive EV/EBITDA Ratios to Grab

Given its inherent simplicity, the price-to-earnings (P/E) ratio is the most commonly used measure in the world of value investing. It is preferred by many investors while picking stocks trading at attractive prices. However, even this simple and widely used valuation measure has some limitations.

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.

PBF Energy Inc. PBF, Innoviva, Inc. INVA, LP Global Partners GLP, Heritage-Crystal Clean, Inc HCCI and Sterling Infrastructure, Inc. STRL are stocks with impressive EV/EBITDA ratios.

What makes EV-to-EBITDA a better alternative?

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.

EBITDA, the other component of the ratio, gives a clearer picture of a company’s profitability because it removes the impact of non-cash expenses such as depreciation and amortization that dampen net profit. It is also often used as a cash flow indicator.

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

However, unlike the P/E ratio, EV/EBITDA takes into account debt on a company’s balance sheet. For this reason, the EV/EBITDA ratio is generally used to assess possible acquisition targets. Stocks with a low EV/EBITDA multiple could be considered potential takeover candidates.

The P/E also 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 earnings but are positive on the EBITDA front.

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

However, EV-to-EBITDA is not without flaws and alone cannot conclusively determine a stock’s inherent potential and future performance. The multiple varies from industry to industry and is generally not appropriate for comparing stocks from different industries, given their varying capital expenditure needs.

Therefore, a strategy based solely on the EV/EBITDA ratio might not yield the desired results. But you can combine it with the other major ratios in your stock investing toolkit, such as price-to-book (P/B), P/E, and price-to-sales (P/S) ratio to filter value stocks.

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 our five picks from the 12 stocks that made it to the screen:

PBF Energy provides finished products including fuel oil, transportation fuels, lubricants and many related products. This rank 1 stock from Zacks has a value score of A.

PBF Energy has an expected profit growth rate of 1,048.8% for the current year. The Zacks consensus estimate for PBF earnings for the current year has been revised up 24.8% in the past 60 days.

Innoviva is a diversified holding company with a portfolio of royalties and other healthcare assets. INVA, displaying a Zacks rank #1, has a value score of A. You can see the full list of today’s Zacks #1 Rank stocks here.

Innoviva forecasts a year-over-year earnings growth rate of 5.8% for the current year. INVA’s consensus earnings estimate for the current year has been revised upwards by 8.8% in the past 60 days.

Global Partners focuses on the distribution of gasoline, distillates, residual oils and renewable fuels, in addition to owning several terminals for refined petroleum products. GLP, a Zacks Rank #1 stock, has a Value Score of A.

Global Partners forecasts a year-over-year earnings growth rate of 654.2% for the current year. GLP’s consensus estimate for the current year has been revised upwards by 37.8% in the past 60 days.

Legacy-Crystal Clean is a leading provider of parts cleaning, used oil refining, and hazardous and non-hazardous waste services. This rank 2 action from Zacks has a value score of A.

Heritage-Crystal Clean has an expected profit growth rate of 26.6% for the current year. HCCI’s earnings have exceeded the Zacks consensus estimate in each of the past four quarters, averaging 37%.

Sterling Infrastructure specializes in transport, e-infrastructure and building solutions. This rank 2 action from Zacks has a value score of A.

Sterling Infrastructure has an expected profit growth rate of 47.4% for the current year. The Zacks consensus estimate for STRL earnings for the current year has been revised up 4.6% in the past 60 days.

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Disclosure: Officers, directors and/or employees of Zacks Investment Research may own or have sold securities short 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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Global Partners LP (GLP): Free Stock Analysis Report

Sterling Infrastructure, Inc. (STRL): Free Stock Analysis Report

PBF Energy Inc. (PBF): Free Stock Analysis Report

HeritageCrystal Clean, Inc. (HCCI): Free Stock Analysis Report

Innoviva, Inc. (INVA): Free Inventory Analysis Report

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