Pick These 5 Bargain Stocks With Exciting 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 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.

Pampa Energia S.A. PAM, Nomad Foods Limited NOMD, KB Home KBH, Columbia Banking System, Inc. COLB and Silgan Holdings Inc. SLGN are some stocks with attractive EV-to-EBITDA ratios.

EV-to-EBITDA is a Better Option, Here’s Why

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 of the ratio, gives a clearer picture of a company’s profitability as it strips out non-cash expenses like depreciation and amortization that reduce net earnings. It is also often used as a proxy for cash flows. 

Generally, the lower the EV-to-EBITDA ratio, the more enticing it is. A low EV-to-EBITDA ratio could indicate that a stock is potentially 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 potential 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. 

P/E also cannot 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. It can also be used to compare companies with different levels of debt.

However, 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.

As such, 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 your desired results.

Screening Criteria

Here are the parameters to screen for bargain 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 seven stocks that passed the screen:

Pampa Energia is a leading independent energy-integrated company in Argentina. This Zacks Rank #1 stock has a Value Score of A. 

Pampa Energia has an expected year-over-year earnings growth rate of 73.5% for 2024. PAM beat the Zacks Consensus Estimate in three of the last four quarters. In this time frame, it has delivered an earnings surprise of roughly 62%, on average.

Nomad Foods manufactures and distributes frozen foods primarily in the United Kingdom, Italy, Germany, Sweden, France and Norway. This Zacks Rank #2 stock has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

Nomad Foods has an expected year-over-year earnings growth rate of 12.6% for 2024. The Zacks Consensus Estimate for NOMD’s 2024 earnings has been revised 1% upward over the last 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.

KB Home has an expected year-over-year earnings growth rate of 19.8% for fiscal 2024. The Zacks Consensus Estimate for KBH’s fiscal 2024 earnings has been revised 0.5% upward over the last 60 days. 

Columbia Banking System is a registered financial holding company, providing a broad range of banking, private banking, mortgage, and other financial services to corporate, institutional, small business and individual customers. This Zacks Rank #2 stock has a Value Score of B.

The consensus estimate for Columbia Banking System’s 2024 earnings has been stable over the last 60 days. COLB’s earnings beat the Zacks Consensus Estimate in three of the last four quarters. In this time frame, it has delivered an earnings surprise of roughly 1.6%, on average. 

Silgan Holdings is a leading supplier of rigid packaging for consumer goods products. Its products are used in diverse end markets. This Zacks Rank #2 stock has a Value Score of B.

Silgan Holdings has an expected year-over-year earnings growth rate of 7.7% for 2024. SLGN’s earnings beat the Zacks Consensus Estimate in each of the last four quarters at an average of roughly 3.6%. 

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.

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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.

Disclosure: Performance information for Zacks’ portfolios and strategies are available at: https://www.zacks.com/performance.

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Silgan Holdings Inc. (SLGN): Free Stock Analysis Report
 
Pampa Energia S.A. (PAM): Free Stock Analysis Report
 
KB Home (KBH): Free Stock Analysis Report
 
Columbia Banking System, Inc. (COLB): Free Stock Analysis Report
 
Nomad Foods Limited (NOMD): Free Stock Analysis Report

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