Price-to-earnings (P/E), given its inherent simplicity, is the most commonly used metric in the value-investing world. It is preferred by many investors while handpicking stocks trading at a bargain. However, even this straightforward, broadly used valuation metric has a few downsides.

Although P/E enjoys great popularity among value investors, a less-used and more complicated metric called EV-to-EBITDA is sometimes viewed as a better alternative. EV-to-EBITDA gives the true picture of a company’s valuation and earnings potential. It has a more comprehensive approach to valuation.  

ADT Inc. ADT, EZCORP, Inc. EZPW, OppFi Inc. OPFI, American Assets Trust, Inc. AAT and Avangrid, Inc. AGR 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 to 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. 

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. 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.

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.

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 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: 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 11 stocks that passed the screen:

ADT provides security and automation solutions for homes and businesses, primarily in the United States and Canada. This Zacks Rank #2 stock has a Value Score of A.

ADT has an expected year-over-year earnings growth rate of 45.1% for 2024. The Zacks Consensus Estimate for ADT’s 2024 earnings has been revised 12.1% higher over the last 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 #2 stock has a Value Score of A. You can see the complete list of today’s Zacks #1 Rank stocks here.

EZCORP has an expected year-over-year earnings growth rate of 12.5% for fiscal 2025. The consensus estimate for EZPW’s fiscal 2025 earnings has been revised 2.4% upward over the past 60 days.

OppFi is a tech-enabled specialty finance platform that powers community banks to help everyday consumers gain access to credit. This Zacks Rank #2 stock has a Value Score of A. 

OppFi has an expected year-over-year earnings growth rate of 68.6% for 2024. The Zacks Consensus Estimate for OPFI’s 2024 earnings has been revised 16.2% upward over the past 60 days.

American Assets Trust is a vertically integrated real estate investment trust that acquires, develops and manages premier office, retail and residential properties throughout the United States. This Zacks Rank #2 stock has a Value Score of B. 

American Assets Trust has an expected year-over-year earnings growth rate of 5.4% for 2024. The consensus estimate for AAT’s 2024 earnings has been revised 9.1% upward over the past 60 days.

Avangrid is a leading sustainable energy company in the United States. This Zacks Rank #2 stock has a Value Score of B. 

Avangrid has an expected year-over-year earnings growth rate of 12% for 2024. The Zacks Consensus Estimate for AGR’s 2024 earnings has been revised 4.5% 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.

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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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EZCORP, Inc. (EZPW) : Free Stock Analysis Report

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