Enterprise Multiple Screen

The Enterprise Multiple finds undervalued, out-of-favor stocks that are ripe for activist takeovers. This strategy measures a company’s valuation based on its enterprise value to EBIT, rather than the more common ratio of market capitalization to net earnings.

Description

Where market capitalization is the value of a business’s equity, enterprise value includes equity plus debt less cash. It is the cost to acquire the entire company. EBIT is earnings before interest, taxes, depreciation, and amortization.

Using EBIT in place of net earnings provides a clearer picture of a company’s operating profits. By not including interest or taxes, the metric compares the operational structure of the business, rather than letting a company’s financing and tax statuses affect its profitability.

Source

The Enterprise Multiple is discussed at length in What Works On Wall Street, Quantitative Value, and Deep Value.

In What Works On Wall Street, the enterprise multiple was determined as the best performing single-metric price ratio over time.

The authors of Quantitative Value came to the same conclusion, “After dissecting price ratios in every manner possible, we found the enterprise multiple comes out on top.”

These same findings were discussed in Deep Value. When discussing the performance of different price ratios the book states, “The enterprise multiple is the better metric when it comes to identifying undervalued stocks.”

Enterprise Multiple Results

Premium Membership: The 200 stocks meeting all the core criteria with the lowest combined rank are displayed in spreadsheet format. Premium screens can be sorted by fundamentals.

Core Criteria

• Operating Profit (TTM) > 0
• Currency = USD
• Sector ≠ Financials, Utilities

Valuation Factors

• Enterprise Multiple = Enterprise Value / EBIT (TTM)
• Enterprise Value = Market Cap + Total Debt + Minority Interest + Preferred Stock – Cash, Cash Equivalents and Short-term Investments
• EBIT = Earnings Before Interest & Taxes

Implementation

A good way to implement this strategy is by regularly investing equal amounts in the qualifying stocks with the lowest enterprise multiple.

Follow along with our corresponding Shadow Stock Portfolio as it systematically invests based on the results of this stock screen.