In early 2010, I relaxed the criteria for what has typically been a fairly successful stock screen -- one that identifies companies trading at relatively low levels of enterprise value (EV) to EBITDA (earnings before interest, taxes, depreciation and amortization), by reducing the limit on price to book value from 1 to 2. The idea was not to lower my standards, but rather open up the opportunity set in a market environment where value was scarce.
The search included the following criteria:
- Market caps greater than $250 million,
- EV to EBITDA less than 10,
- Total debt to equity less than 50%,
- Price-to-book value less than 2,
- Average daily trading volume in excess of 10,000 shares, and
- No financial companies.
In fact, the 18 names that made the cut last year were down an average of about 1.8% in 2011. While 10 companies were in positive territory, the biggest losers, which included Ruby Tuesday (RT) (-52%), Five Star Quality Care (FVE) (-58%), and Kindred Healthcare (KND) (-37%), overshadowed winning performances by America's Car Mart (CRMT) +41%), Amerigroup (AGP) (+31%), Aaron's (AAN) (+29%) and Foot Locker (FL) (+25%).
Just out of curiosity, I recently tightened up the price-to-book criteria, reducing the limit back to 1 in order to see whether there were any candidates. Not surprisingly, pickings were still very slim, with just two names making the cut. These included holding company Leucadia National (LUK), whose businesses run the gamut from timber, to plastics, to oil and gas drilling, to gaming entertainment, to medical product development. The company also has investments in a number of companies that include Jeffries Group (JEF) and Mueller Industries (MLI). In December, the company acquired controlling interest in National Beef Packing Company, adding to an already eclectic mix of businesses.
Leucadia is not name you'll hear often. Despite its $6 billion market cap, there is no analyst coverage. The company is currently trading at 6x EV to EBITDA, just below tangible book value per share, and yields 1.1%. If there was ever a company ripe for a sum-of-the-parts valuation, this is the one.
Also making the cut in the more stringent EV to EBITDA screen was water infrastructure and mineral exploration company Layne Christensen (LAYN), which is currently trading at 5x EV to EBITDA, 0.91x price-to-book value, and 12x trailing earnings. While the company's mineral exploration business has been doing well, the water business has been struggling a bit.
I'll be back in a future column with the current crop of companies meeting the more relaxed criteria set in the EV to EBITDA search. Interestingly, at this writing, it's a rather lengthy list of names, about twice as long as last year's.