Chicago, IL – October 21, 2024 – Stocks in this week’s article are Pampa Energia S.A. PAM, Nomad Foods Ltd. NOMD, KB Home KBH, Columbia Banking System, Inc. COLB and Silgan Holdings Inc. SLGN.
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., Nomad Foods Ltd., KB Home, Columbia Banking System, Inc. and Silgan Holdings Inc. 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.
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%.
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