Value stocks

5 Value Stocks With Impressive EV/EBITDA Ratios To Own Now – June 6, 2022

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. However, even this universally used valuation multiple is not without limits.

Although P/E enjoys great popularity among value investors, a less used and more complicated measure called EV-to-EBITDA is sometimes considered 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.

Hunter’s Society (HUN free report), MarineMax, Inc. (HZO free report), Daqo New Energy Corp. (DQ free report), PBF Energy Inc. (PBF free report) and Ryder System, Inc. (R Free Report) are stocks with impressive EV/EBITDA ratios.

EV/EBITDA is a better approach, here’s why

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 clearer picture of a company’s profitability because it eliminates non-cash expenses such as depreciation and amortization that reduce net income. It is also often used as a cash flow indicator.

Just like the P/E, the lower the EV/EBITDA ratio, the more attractive it is. A low EV/EBITDA ratio signals that a stock is potentially undervalued.

The EV to EBITDA takes into account the debt on a company’s balance sheet, which the P/E ratio does not take into account. For this reason, the EV/EBITDA ratio is generally used to assess potential acquisition targets, as it indicates the amount of debt the acquirer must assume. Stocks with a low EV/EBITDA multiple could be seen as attractive recovery candidates.

Another shortcoming of the P/E is that it cannot be used to value a loss-making company. A company’s earnings are also subject to accounting estimates and management manipulation. On the other hand, the EV/EBITDA ratio is difficult to manipulate and can also be used to assess companies that are incurring losses but have positive EBITDA.

The EV/EBITDA ratio is also a useful tool for measuring the value of highly leveraged and highly amortized 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 our five picks from the 13 stocks that made it to the screen:

Hunter is a leading manufacturer of differentiated and basic chemicals. This rank 1 stock from Zacks has a value score of A.

Huntsman forecasts a 26.8% earnings growth rate for the current year. The Zacks consensus estimate for HUN’s current-year earnings has been revised up 11.7% in the past 60 days.

Marine Max is a leading retailer of pleasure boats and yachts. 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.

MarineMax has an expected year-over-year earnings growth rate of 21.5% for the current fiscal year. The Zacks consensus estimate for HZO’s current-year earnings has been revised up 4.6% over the past 60 days.

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 432.8% for the current year. PBF’s consensus earnings estimate for the current year has been revised upwards by 191.9% in the past 60 days.

Daqo New Energy is a leading producer of high purity polysilicon. This rank 1 stock from Zacks has a value score of A.

Daqo New Energy has an expected profit growth rate of 129.8% for the current year. The Zacks consensus estimate for DQ’s earnings for the current year has been revised up 26.7% in the past 60 days.

Ryder system is one of the world’s largest providers of integrated logistics and transportation solutions. This rank 1 stock from Zacks has a value score of A.

Ryder System forecasts a 46% profit growth rate for the current year. R’s consensus revenue estimate for the current year has been revised upwards by 20% in the last 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 advisory firm may hold or have shorted securities and/or hold long and/or short positions in options mentioned herein.

Disclosure: Information on the performance of Zacks portfolios and strategies is available at: https://www.zacks.com/performance.