Although my preferred metric for finding value remains price-to-book-value, I also use the enterprise-value-to-EBITDA ratio to find cheap stocks with strong recovery potential.
Tobias Carlisle has a new book out called Deep Value: Why Activist Investors and Other Contrarians Battle for Control of Losing Corporations that points out that the EV/EBITDA equation is the acquirer’s favorite multiple.
It’s the valuation multiple most favored by Private Equity and LBO buyers and is a key part of strategic buyer’s calculation as well. It just makes sense to use this multiple to find stocks selling at well below average multiples.
It works outside the U.S. as well as it does at home. We can apply the EV/EBITDA ratio around the globe to find stocks trading below levels that often attract the attention of private equity buyers as well as other deep value investors who use the ratio to pick potential winning stocks.
I sat down this morning and ran a screen for international stocks that trade at very low EV/EBITDA ratios and are potential bargains. Because the success of the ratio depends very much on earnings before interest, taxes, depreciation and amortization staying at the current levels or higher I thinned the universe to only those companies where EBITDA has been growing.
Sony (SNE)
One of the stocks that passes this value test is Sony (SNE). The global consumer electronics leader has been focusing on restructuring its business the past few years to focus on the core media, gaming and television businesses. SNE also exited the struggling personal computer business.
The moves seem to be working, as the company has grown EBITDA by 25% annually over the past five years. Uncertainty around the demand for consumer electronics has kept the stock from climbing, and right now the shares trade with an EV/EBITDA ratio of just 3.3.
GeoPark Limited (GPRK)
GeoPark Limited (GPRK) is a Latin American oil and gas company that has properties in Chile, Colombia, Brazil and Argentina. The company is seeing very strong results with Revenues up 80% driven by increased production in the most recent quarter. Total Oil and gas production was up 57% in the quarter.
The company has been doing a fantastic job the last 5 years with EBITDA growing by an average of more than 80% per year. In spite of this, concerns about energy market and Latin American have kept the Chilean company from seeing a big rally in its shares. The EV/EBITDA ratio right now is just 4.3.
B Communications (BCOM)
B Communications (BCOM) is an Israeli telecommunication company. BCOM provides fixed line and cellular service, televisions, radio and internet services. The company has been growing EBITDA at a rapid clip but the stock is still very cheap. Right now B Communication shares trade hands with an EV/EBITDA ratio of just 3.2. The company also ay a decent dividend, and shareholders will collect a 4.8% yield will waiting for the stock to move higher.
Bottom Line
The EV/EBITDA ratio is used around the world by those who make their money buying entire companies. It makes a great deal of sense for us to use it when evaluating the portions of companies we buy in the equity markets.
As of this writing, Tim Melvin did not hold a position in any of the aforementioned securities.
