For Immediate Release
Chicago, IL – June 07, 2017 - Stocks in this week’s article include ArcelorMittal (NYSE: MT – Free Report ), LG Display Co., Ltd. (NYSE: LPL – Free Report ), Boise Cascade Company (NYSE: BCC – Free Report ), Fiat Chrysler Automobiles N.V. (NYSE: FCAU – Free Report ) and Regal Beloit Corporation (NYSE: RBC – Free Report ).
Screen of the Week of Zacks Investment Research:
Pick These 5 Value Stocks with Alluring EV/EBITDA Ratios
Value investors tend to cling to the price-to-earnings (P/E) strategy while looking for stocks that are trading at attractive prices. P/E, without a shadow of a doubt, is the most popular multiple used by investors for evaluating the fair market value of a stock. But even this straightforward, ubiquitously used valuation metric is not without its downsides.
Is EV/EBITDA a Better Substitute to P/E?
While P/E, given its simplicity, is hands down the most commonly used equity valuation ratio in the market, a more complicated metric called EV/EBITDA is often viewed as a better option as it offers a clearer image of a company’s valuation and earnings potential. Unlike P/E that solely considers a company’s equity portion, EV/EBITDA determines its total value.
EV/EBITDA, also dubbed as the enterprise multiple, 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. Basically, it is the full value of a company.
EBITDA, the other component of the multiple, is a true reflection of a company’s profitability as it removes the impact of non-cash expenses like depreciation and amortization that dilute net earnings.
Generally, the lower the EV/EBITDA ratio, the more attractive it is. A low EV/EBITDA ratio could imply that a stock is potentially undervalued and vice versa.
EV/EBITDA also takes into account the debt on a company’s balance sheet that P/E does not. For this reason, EV/EBITDA is usually used to value possible acquisition targets, as it shows the amount of debt the acquirer has to assume. Stocks boasting a low EV/EBITDA multiple could be seen as attractive takeover candidates.
Another limitation of P/E is that it can’t be used to value a loss-making entity. A firm’s earnings are also subject to accounting estimates and management manipulation. EV/EBITDA, in contrast, is hard to manipulate and can also be used to value firms that have negative net earnings but are positive on the EBITDA front.
EV/EBITDA is also a useful yardstick in measuring the value of firms that are highly leveraged and have a high degree of depreciation. It also can be used to compare companies with different levels of debt.
But EV/EBITDA is not without its limitations and it alone can’t conclusively determine a stock’s inherent potential and future performance. The ratio varies across industries and is generally not appropriate while comparing stocks in different industries given their diverse capital spending requirements.
Thus, a strategy solely based on EV/EBITDA might not fetch the desired results. But you can club it with other key ratios such as price-to-book (P/B), P/E and price-to-sales (P/S) to screen true value stocks.
Screening Criteria
Here are the parameters to screen for value stocks:
EV/EBITDA 12 Months-Most Recent less than X-Industry Median: A lower EV/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. This is a meaningful indicator as decent earnings growth always adds to investor optimism.
Average 20-day Volume greater than or equal to 100,000: 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: No screening is complete without the Zacks Rank, which has proven its worth since inception. 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 Style Score of ‘A’ or ‘B’ when combined with a Zacks Rank #1 or 2 offer the best upside potential.
Here are five of the 15 stocks that passed the screen:
ArcelorMittal (NYSE:MT – Free Report ) is a leading steel company, operating a balanced portfolio of cost competitive steel plants across both the developed and developing markets. This Zacks Rank #1 stock has an expected earnings per share (EPS) growth rate of 11.6% for 3 to 5 years.
LG Display Co., Ltd. (NYSE:LPL – Free Report ) primarily manufactures and sells thin film transistor liquid crystal display (TFT-LCD) panels. This Zacks Rank #1 stock has an expected year-over-year earnings growth rate of 84.5% for 2017. You can see the complete list of today’s Zacks #1 Rank stocks here .
Boise Cascade Company (NYSE:BCC – Free Report ) operates as a wood products manufacturer and building materials distributor. This Zacks Rank #1 stock delivered an average positive earnings surprise of 114.7% in the trailing four quarters.
Fiat Chrysler Automobiles N.V. (NYSE:FCAU – Free Report ) operates as an international automotive company and is engaged in designing, engineering, manufacturing, distributing and selling vehicles and components and production systems. This Zacks Rank #2 stock has an expected EPS growth rate of 22.4% for 3 to 5 years.
Regal Beloit Corporation (NYSE:RBC – Free Report ) is a leading manufacturer of electrical and mechanical motion control and power generation products serving markets throughout the world. This Zacks Rank #2 stock has an expected EPS growth rate of 9% for 3 to 5 years.
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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 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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ArcelorMittal (MT): Free Stock Analysis Report
LG Display Co., Ltd. (LPL): Free Stock Analysis Report
Boise Cascade, L.L.C. (BCC): Free Stock Analysis Report
Fiat Chrysler Automobiles N.V. (FCAU): Free Stock Analysis Report
Regal Beloit Corporation (RBC): Free Stock Analysis Report
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