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Tap These 5 Bargain Stocks with Impressive EV-to-EBITDA Ratios
The price-to-earnings (P/E) ratio is broadly considered the yardstick for evaluating the fair market value of a stock. It is preferred by many investors while handpicking stocks trading at attractive prices. However, even this universally used valuation multiple is not without its 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 an accurate 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.
Park Hotels & Resorts Inc., Kelly Services, Inc., DNOW Inc., KB Home and AAR Corp. are some stocks with attractive EV-to-EBITDA ratios.
Here's Why EV-to-EBITDA is a Better Option
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, gives a clearer picture of a company's profitability by removing the impact of non-cash expenses like depreciation and amortization that dampen net earnings. It is also often used as a proxy for cash flows.
Typically, the lower the EV-to-EBITDA ratio, the more enticing it is. A low EV-to-EBITDA ratio could indicate that a stock is undervalued.
Unlike the P/E ratio, EV-to-EBITDA takes debt on a company's balance sheet into account. For this reason, it is typically used to value acquisition targets. The ratio shows the amount of debt that the acquirer has to bear. Stocks flaunting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Moreover, P/E can't be used to value a loss-making firm. A firm's earnings are also subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is harder to manipulate and can be used to value companies that have negative net earnings but are positive on the EBITDA front.
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.
But EV-to-EBITDA has its limitations, too. The ratio varies across industries (a high-growth industry typically has a higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries, given their diverse capital requirements.
Thus, instead of just relying on EV-to-EBITDA, you can club it with the other major ratios, such as price-to-book (P/B), P/E and price-to-sales (P/S), to achieve the desired results.
Here are our five picks out of the 11 stocks that passed the screen:
Park Hotels & Resorts is a leading publicly-traded lodging REIT with a diverse portfolio of iconic and market-leading hotels and resorts. This Zacks Rank #1 stock has a Value Score of A.
Park Hotels & Resorts has an expected year-over-year earnings growth rate of 7.8% for 2024. The Zacks Consensus Estimate for PK's 2024 earnings has been revised upward by 1.4% over the past 60 days.
The consensus estimate for Kelly Services' 2024 earnings has been revised 21.3% upward over the last 60 days. KELYA beat the Zacks Consensus Estimate in three of the last four quarters. In this time frame, it has delivered an earnings surprise of roughly 45.8%, on average.
DNOW is a supplier of energy and industrial products and packaged, engineered process and production equipment. This Zacks Rank #2 stock has a Value Score of A.
DNOW has an expected earnings growth rate of 9.3% for 2024. The consensus estimate for DNOW's 2024 earnings has been stable over the past 60 days.
KB Home is one of the largest and most recognized homebuilders in the United States. This Zacks Rank #2 stock has a Value Score of A.
The Zacks Consensus Estimate for KB Home's fiscal 2024 earnings has been revised 3.7% 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 18.4%.
AAR provides various products and services to the aviation and defense industries worldwide. AIR, a Zacks Rank #2 stock, has a Value Score of B.
AAR has an expected year-over-year earnings growth rate of 15.4% for the current fiscal year. AIR beat the Zacks Consensus Estimate in three of the last four quarters while matching it once, with the average earnings surprise being roughly 4%.
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.
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.
About Screen of the Week
Zacks.com created the first and best screening system on the web earning the distinction as the "#1 site for screening stocks" by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use.
Strong Stocks that Should Be in the News
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has more than doubled the market from 1988 through 2016. Its average gain has been a stellar +25% per year. See these high-potential stocks free >>.
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Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.
See More Zacks Research for These Tickers
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Zacks.com featured highlights include Park Hotels & Resorts, Kelly Services, DNOW, KB Home and AAR
For Immediate Release
Chicago, IL – July 12, 2024 – Stocks in this week’s article are Park Hotels & Resorts Inc. (PK - Free Report) , Kelly Services, Inc. (KELYA - Free Report) , DNOW Inc. (DNOW - Free Report) , KB Home (KBH - Free Report) and AAR Corp. (AIR - Free Report) .
Tap These 5 Bargain Stocks with Impressive EV-to-EBITDA Ratios
The price-to-earnings (P/E) ratio is broadly considered the yardstick for evaluating the fair market value of a stock. It is preferred by many investors while handpicking stocks trading at attractive prices. However, even this universally used valuation multiple is not without its 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 an accurate 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.
Park Hotels & Resorts Inc., Kelly Services, Inc., DNOW Inc., KB Home and AAR Corp. are some stocks with attractive EV-to-EBITDA ratios.
Here's Why EV-to-EBITDA is a Better Option
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, gives a clearer picture of a company's profitability by removing the impact of non-cash expenses like depreciation and amortization that dampen net earnings. It is also often used as a proxy for cash flows.
Typically, the lower the EV-to-EBITDA ratio, the more enticing it is. A low EV-to-EBITDA ratio could indicate that a stock is undervalued.
Unlike the P/E ratio, EV-to-EBITDA takes debt on a company's balance sheet into account. For this reason, it is typically used to value acquisition targets. The ratio shows the amount of debt that the acquirer has to bear. Stocks flaunting a low EV-to-EBITDA multiple could be seen as attractive takeover candidates.
Moreover, P/E can't be used to value a loss-making firm. A firm's earnings are also subject to accounting estimates and management manipulation. In contrast, EV-to-EBITDA is harder to manipulate and can be used to value companies that have negative net earnings but are positive on the EBITDA front.
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.
But EV-to-EBITDA has its limitations, too. The ratio varies across industries (a high-growth industry typically has a higher multiple and vice versa) and is usually not appropriate while comparing stocks in different industries, given their diverse capital requirements.
Thus, instead of just relying on EV-to-EBITDA, you can club it with the other major ratios, such as price-to-book (P/B), P/E and price-to-sales (P/S), to achieve the desired results.
Here are our five picks out of the 11 stocks that passed the screen:
Park Hotels & Resorts is a leading publicly-traded lodging REIT with a diverse portfolio of iconic and market-leading hotels and resorts. This Zacks Rank #1 stock has a Value Score of A.
Park Hotels & Resorts has an expected year-over-year earnings growth rate of 7.8% for 2024. The Zacks Consensus Estimate for PK's 2024 earnings has been revised upward by 1.4% over the past 60 days.
Kelly Services is a global leader in providing workforce solutions to various industries. This Zacks Rank #1 stock has a Value Score of A. You can see the complete list of today's Zacks #1 Rank stocks here.
The consensus estimate for Kelly Services' 2024 earnings has been revised 21.3% upward over the last 60 days. KELYA beat the Zacks Consensus Estimate in three of the last four quarters. In this time frame, it has delivered an earnings surprise of roughly 45.8%, on average.
DNOW is a supplier of energy and industrial products and packaged, engineered process and production equipment. This Zacks Rank #2 stock has a Value Score of A.
DNOW has an expected earnings growth rate of 9.3% for 2024. The consensus estimate for DNOW's 2024 earnings has been stable over the past 60 days.
KB Home is one of the largest and most recognized homebuilders in the United States. This Zacks Rank #2 stock has a Value Score of A.
The Zacks Consensus Estimate for KB Home's fiscal 2024 earnings has been revised 3.7% 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 18.4%.
AAR provides various products and services to the aviation and defense industries worldwide. AIR, a Zacks Rank #2 stock, has a Value Score of B.
AAR has an expected year-over-year earnings growth rate of 15.4% for the current fiscal year. AIR beat the Zacks Consensus Estimate in three of the last four quarters while matching it once, with the average earnings surprise being roughly 4%.
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.
For the rest of this Screen of the Week article please visit Zacks.com at: https://www.zacks.com/stock/news/2299832/tap-these-5-bargain-stocks-with-impressive-ev-to-ebitda-ratio
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.
About Screen of the Week
Zacks.com created the first and best screening system on the web earning the distinction as the "#1 site for screening stocks" by Money Magazine. But powerful screening tools is just the start. That is why Zacks created the Screen of the Week to highlight profitable stock picking strategies that investors can actively use.
Strong Stocks that Should Be in the News
Many are little publicized and fly under the Wall Street radar. They're virtually unknown to the general public. Yet today's 220 Zacks Rank #1 "Strong Buys" were generated by the stock-picking system that has more than doubled the market from 1988 through 2016. Its average gain has been a stellar +25% per year. See these high-potential stocks free >>.
Follow us on Twitter: https://www.twitter.com/zacksresearch
Join us on Facebook: https://www.facebook.com/ZacksInvestmentResearch
Zacks Investment Research is under common control with affiliated entities (including a broker-dealer and an investment adviser), which may engage in transactions involving the foregoing securities for the clients of such affiliates.
Contact: Jim Giaquinto
Company: Zacks.com
Phone: 312-265-9268
Email: pr@zacks.com
Visit: https://www.zacks.com/
Zacks.com provides investment resources and informs you of these resources, which you may choose to use in making your own investment decisions. Zacks is providing information on this resource to you subject to the Zacks "Terms and Conditions of Service" disclaimer. www.zacks.com/disclaimer.
Past performance is no guarantee of future results. Inherent in any investment is the potential for loss. This material is being provided for informational purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable. All information is current as of the date of herein and is subject to change without notice. Any views or opinions expressed may not reflect those of the firm as a whole. Zacks Investment Research does not engage in investment banking, market making or asset management activities of any securities. These returns are from hypothetical portfolios consisting of stocks with Zacks Rank = 1 that were rebalanced monthly with zero transaction costs. These are not the returns of actual portfolios of stocks. The S&P 500 is an unmanaged index. Visit https://www.zacks.com/performancefor information about the performance numbers displayed in this press release.