The First Cut: Using Enterprise Value to Locate Bargains
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.
Enterprise Val to EBITDA
|Historical Ann'l Growth Rate||
LT Debt to Equity
52-Wk Price Change
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.