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5 Value Stocks With Exciting EV-to-EBITDA Ratios to Scoop Up
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Investors generally tend to cling to the price-to-earnings (P/E) metric while looking for bargain stocks. In addition to being a widely used tool for screening stocks, P/E is also a popular metric to work out the fair market value of a company. But even this ubiquitously used valuation multiple has a few downsides.
While P/E is by far the most popular equity valuation ratio, a more complicated metric called EV-to-EBITDA does a better job of valuing a firm. Often viewed as a better substitute to P/E, this ratio offers a clearer picture of a company’s valuation and its earnings potential.
KT Corporation (KT - Free Report) , Hamilton Insurance Group, Ltd. (HG - Free Report) , EZCORP, Inc. (EZPW - Free Report) , Financial Institutions, Inc. (FISI - Free Report) and The Greenbrier Companies, Inc. (GBX - Free Report) 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, 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.
The lower the EV-to-EBITDA ratio, the more enticing it is. A low EV-to-EBITDA ratio indicates 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 yardstick in measuring the value of firms that are highly leveraged and have a high degree of depreciation. It can also be used to compare companies with different levels of debt.
EV-to-EBITDA is not devoid of limitations 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. 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.
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: 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 10 stocks that passed the screen:
KT is the biggest telecommunications operator in the Republic of Korea. This Zacks Rank #1 stock has a Value Score of A.
KT has an expected earnings growth rate of 20% for 2024. The Zacks Consensus Estimate for KT's 2024 earnings has been revised 3.9% upward over the past 60 days.
Hamilton Insurance Group is a specialty insurance and reinsurance company that underwrites risks worldwide. 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.
Hamilton Insurance Group has an expected earnings growth rate of 72.5% for 2024. The consensus estimate for HG's 2024 earnings has been revised 22.7% upward over the past 60 days.
EZCORP is engaged in establishing, acquiring and operating pawnshops that function as convenient sources of consumer credit and value-oriented specialty retailers of primarily previously owned merchandise. This Zacks Rank #1 stock has a Value Score of A.
EZCORP has an expected year-over-year earnings growth rate of 22.8% for fiscal 2024. The consensus estimate for EZPW’s fiscal 2024 earnings has been revised 1.8% upward over the past 60 days.
Financial Institutions is a financial holding company offering banking and wealth management products and services. This Zacks Rank #1 stock has a Value Score of B.
FISI has an expected earnings growth rate of 15.6% for 2024. The Zacks Consensus Estimate for FISI's 2024 earnings has been revised 14.1% upward over the past 60 days.
The Greenbrier Companies is a leading supplier of transportation equipment and services to the railroad and related industries. This Zacks Rank #2 stock has a Value Score of A.
The Greenbrier Companies has an expected year-over-year earnings growth rate of 46.5% for fiscal 2024. The consensus estimate for GBX’s fiscal 2024 earnings has been revised 2.4% 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.
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.
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5 Value Stocks With Exciting EV-to-EBITDA Ratios to Scoop Up
Investors generally tend to cling to the price-to-earnings (P/E) metric while looking for bargain stocks. In addition to being a widely used tool for screening stocks, P/E is also a popular metric to work out the fair market value of a company. But even this ubiquitously used valuation multiple has a few downsides.
While P/E is by far the most popular equity valuation ratio, a more complicated metric called EV-to-EBITDA does a better job of valuing a firm. Often viewed as a better substitute to P/E, this ratio offers a clearer picture of a company’s valuation and its earnings potential.
KT Corporation (KT - Free Report) , Hamilton Insurance Group, Ltd. (HG - Free Report) , EZCORP, Inc. (EZPW - Free Report) , Financial Institutions, Inc. (FISI - Free Report) and The Greenbrier Companies, Inc. (GBX - Free Report) 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, 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.
The lower the EV-to-EBITDA ratio, the more enticing it is. A low EV-to-EBITDA ratio indicates 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 yardstick in measuring the value of firms that are highly leveraged and have a high degree of depreciation. It can also be used to compare companies with different levels of debt.
EV-to-EBITDA is not devoid of limitations 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. 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.
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: 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 10 stocks that passed the screen:
KT is the biggest telecommunications operator in the Republic of Korea. This Zacks Rank #1 stock has a Value Score of A.
KT has an expected earnings growth rate of 20% for 2024. The Zacks Consensus Estimate for KT's 2024 earnings has been revised 3.9% upward over the past 60 days.
Hamilton Insurance Group is a specialty insurance and reinsurance company that underwrites risks worldwide. 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.
Hamilton Insurance Group has an expected earnings growth rate of 72.5% for 2024. The consensus estimate for HG's 2024 earnings has been revised 22.7% upward over the past 60 days.
EZCORP is engaged in establishing, acquiring and operating pawnshops that function as convenient sources of consumer credit and value-oriented specialty retailers of primarily previously owned merchandise. This Zacks Rank #1 stock has a Value Score of A.
EZCORP has an expected year-over-year earnings growth rate of 22.8% for fiscal 2024. The consensus estimate for EZPW’s fiscal 2024 earnings has been revised 1.8% upward over the past 60 days.
Financial Institutions is a financial holding company offering banking and wealth management products and services. This Zacks Rank #1 stock has a Value Score of B.
FISI has an expected earnings growth rate of 15.6% for 2024. The Zacks Consensus Estimate for FISI's 2024 earnings has been revised 14.1% upward over the past 60 days.
The Greenbrier Companies is a leading supplier of transportation equipment and services to the railroad and related industries. This Zacks Rank #2 stock has a Value Score of A.
The Greenbrier Companies has an expected year-over-year earnings growth rate of 46.5% for fiscal 2024. The consensus estimate for GBX’s fiscal 2024 earnings has been revised 2.4% 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.