• The First Cut
  • First Cut
  • The First Cut: Using Enterprise Value to Locate Bargains

    by John Bajkowski

    The First Cut: Using Enterprise Value To Locate Bargains Splash image

    Using Enterprise Value to Locate Bargains

    The First Cut is designed as a starting point for investors. Each issue we list the top 30 stocks that pass relatively simple screens of interest to individual stock pickers. AAII’s Stock Investor Pro screening software is used to generate the First Cut listing.

     

    While market capitalization (stock price times number of outstanding shares) reflects the overall trading value of a company, it does not fully capture the cost of acquiring a firm. Instead, investors turn to the “enterprise value” to help measure the overall outlay of buying out a company. The enterprise value is calculated by adding market capitalization, preferred stock, and total debt and reducing this total by the amount of cash held by the firm. Debt and preferred stock is added because the acquirer must shoulder the cost of assuming the obligations of the firm. Cash is subtracted because once you acquire the firm, it becomes yours.

    To gauge the worth of a company, the enterprise value is normally related to earnings before interest, taxes, depreciation and amortization (EBITDA). EBITDA ignores non-cash expenses such as depreciation of already paid for fixed assets and amortization of intangibles because they do not impact pretax cash flow. EBITDA ignores taxes and interest payments, which will likely change after an acquisition or merger. The enterprise value to EBITDA ratio relates a firm’s takeover cost to its earnings potential. The lower the ratio, the more attractive the firm.

    The stocks that made this issue’s First Cut are domestic, exchange-listed stocks with a minimum share price of $5.00. Financials were excluded because their unique financial structure cannot be directly compared to firms in other industries. As a test for minimum financial strength, stocks were required to have a debt-to-equity level below 50% as well as positive free cash flow. The 30 stocks with the lowest enterprise value to EBITDA made the First Cut. The historical growth rates in the table help to bring to light past top and bottom-line company performance. The 52-week price change highlights the weak stock price performance of most of these stocks. Value screens such as this often turn up out-of-favor companies and industries. Keep in mind that all screens are starting points; the goal of the EV/EBITDA screen is to create a list of attractively priced stocks.

    Using the Ratio of Enterprise Value to EBITDA to Locate Bargains

    Company
    (Exchange: Ticker)
    Enterprise Val to EBITDA
    (X)
    P/E Ratio
    (X)
    Enterprise Value
    ($ Mil)
    Market Cap
    ($ Mil)
    Historical Ann'l Growth Rate LT Debt to Equity
    (%)
    52-Wk Price Change
    (%)
    Description
    Sales 3 Yr
    (%)
    EPS 3 Yr
    (%)
    Imperial Sugar Co. (M: IPSU) 1.3 4.5 85 178 3.7 75.2 0.8 (50) proc & mkts refined sugar
    PeopleSupport, Inc. (M: PSPT) 2.4 40.3 92 196 46.7 35.6 0.0 (23) offshore business outsource
    KSW, Inc. (M: KSW) 2.5 8.6 17 33 43.2 67.3 0.0 (23) heat, vent, & air cond sys
    CSP Inc. (M: CSPI) 2.7 8.6 13 23 22.3 44.7 0.0 (35) IT solutions
    Stone Energy Corp. (N: SGY) 2.8 8.3 1,903 1,978 11.4 13.7 45.2 104 oil & natural gas
    KapStone Paper & Packaging (M: KPPC) 2.9 9.2 165 177 na na 20.7 1 kraft paper & linerboard
    Barrett Business Services (M: BBSI) 3.2 9.4 80 135 14.0 22.2 0.0 (51) HR mgmt servs
    Mediware Info. Systems (M: MEDW) 3.3 58.5 24 45 3.9 (14.0) 0.0 (22) clinical mgmt info software
    Horsehead Holding (M: ZINC) 3.4 6.9 441 520 36.2 267.2 0.0   zinc-based prods
    Barnes & Noble, Inc. (N: BKS) 3.4 14.7 1,332 1,693 3.5 6.5 0.0 (23) bookseller
    American Biltrite Inc. (A: ABL) 3.6 nmf 30 21 (1.0) (41.6) 33.7 (34) floor, tape & rubber prods
    Atlantic Tele-Network, Inc. (M: ATNI) 3.6 10.5 381 406 27.9 35.8 23.3 3 telecom servs
    JAKKS Pacific, Inc. (M: JAKK) 3.6 8.5 514 654 14.3 23.0 14.1 (6) toys & related prods
    Novatel Wireless, Inc. (M: NVTL) 3.8 9.1 192 291 60.6 36.1 0.1 (57) wireless broadband sols
    VAALCO Energy, Inc. (N: EGY) 3.9 27.9 375 446 30.3 (9.4) 3.5 46 oil & natural gas
    North American Galvanizing (M: NGA) 3.9 8.6 77 81 35.2 162.1 0.0 (34) coatings holding co
    Air T, Inc. (M: AIRT) 3.9 7.0 21 22 6.3 6.0 4.2 14 air cargo servs
    Dynacq Healthcare, Inc. (M: DYII) 3.9 8.5 71 95 3.0 40.9 0.7 216 hospital holding co
    AutoNation, Inc. (N: AN) 3.9 7.5 4,603 2,939 (1.3) 0.0 47.7 (22) auto retailer
    Cal-Maine Foods, Inc. (M: CALM) 4.0 6.0 814 798 1.5 (17.2) 36.1 175 prods & mkts shell eggs
    LoJack Corporation (M: LOJN) 4.0 11.3 136 170 15.2 20.9 20.8 (53) recovers stolen vehicles
    SL Industries, Inc. (A: SLI) 4.0 7.2 79 74 19.1 17.8 9.7 (24) power electronics
    Grey Wolf, Inc. (A: GW) 4.0 11.6 1,380 1,391 28.8 170.3 39.8 1 land drilling servs
    Sears Holdings Corp. (M: SHLD) 4.0 16.2 13,952 12,564 36.7 (19.7) 24.4 (47) department store holding co
    RadioShack Corp. (N: RSH) 4.1 9.1 1,988 2,077 (4.2) (5.8) 43.6 (48) retail consumer electronics
    ViroPharma Inc. (M: VPHM) 4.1 8.1 557 632 108.8 54.1 48.3 (39) biopharmaceuticals
    Valero Energy Corp. (N: VLO) 4.1 7.4 30,638 25,595 20.4 33.2 35.5 (34) gas & fuel refiner
    Canterbury Park Holding (A: ECP) 4.2 13.4 27 34 (0.9) (12.3) 0.0 (42) pari-mutuel wagering oper
    Build-A-Bear Workshop (N: BBW) 4.3 8.7 137 178 16.3 35.7 0.0 (69) interactive retail experience
    Werner Enterprises, Inc. (M: WERN) 4.3 20.2 1,243 1,321 7.3 (1.9) 0.0 0 truckload transportation
    Exchange Key: A=American Stock Exchange; M=NASDAQ; N=New York Stock Exchange.
    Source: AAII's
    Stock Investor Pro, Reuters Research, Inc., and I/B/E/S. Data as of 5/16/2008.


    John Bajkowski is president of AAII.


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