I came across this article in Bloomberg news today. It mentions private-equity firms have more than $500 billion of cash waiting to be put to work. The capital must be deployed or else PE firms must return it to their investors. Buyout shops are itching to get their hands on what they see as undervalued assets. Access to credit remains pretty steady and banks are willing to lend, so bankers and analysts expect leveraged buyouts to account for a fair portion of overall M&A activity.
What is out there to buy? Standard & Poor’s has come up with a list of 10 publicly traded companies that could be LBO targets, based on current market trends. Analysts at S&P Valuation & Risk Strategies chose companies in the consumer discretionary and industrial sectors, because these sectors, along with financials, have been especially active for buyouts. Also, they picked companies that have market values of $1 billion to $4 billion, in keeping with the size of recent top LBOs. And finally, they picked companies trading at less than their respective industry’s coming year-end price-to-earnings ratio, which would indicate that the market currently undervalues them.
S&P’s top pick for an LBO is Eastman Kodak, with a market capitalization of roughly $1.2 billion. Private-equity firm KKR already owns a stake in Eastman Kodak.
I am presenting the list along with their market cap, enterprise value, trailing P/E and EV/ EBITDA.
The market cap is simply the number of shares outstanding multiplied by the current share price. Enterprise value (EV) is calculated as market cap of equity plus debt, minority interest and preferred shares, minus total cash and cash equivalents. If the EV is less than the market cap, that means the company has excess cash on its balance sheet. In the table above, Eastman Kodak, EMCOR Group, DSW and Gymboree have EV less than their market cap. I always look at both market cap and EV. One glance at the two numbers tells me how leveraged the company is.
The P/E ratio is the most commonly used ratio by investors. I like it for its simplicity and its usefulness in comparing a company with other competitors, its historic valuation as well as the general market or an index. However, P/E ratios can have their own pitfalls. For one, when looking at cyclicals you can be lulled into a false sense of cheapness by a low P/E. I wrote a post explaining how to value a cyclical using the 10 year average earnings.
EBITDA stands for Earnings Before Interest Tax Depreciation and Amortization. Private Equity (PE) firms more often than not use the EV/ EBITDA (EBITDA multiple) when evaluating deals. I wrote an article on the Use of EBITDA in valuation. In short, it helps them compare companies with different capital structures, tax rates, depreciation and amortization schedules. EBITDA is also often stated to be a rough equivalent of cash flow. Guru Investor Tom Russo also uses the EBITDA multiple as he is often investing internationally and he feels this is a good measure that can be used to compare companies across borders.
If you look at the table above, the P/E ratios for these firms are spread out from 4.7 to 16.5. However if you look at the last column, all the firms have their EBITDA multiples less than 5. This is an attractive valuation on the face of it. Chris Browne, a famous value investor, used to keep track of any acquisitions that would take place in the market along with the multiples paid for EBIT, Earnings, Cash flows etc. He would refer to this database when he would look at prospective investments. He called this as the ‘appraisal method’ of valuation. Michael Price, another renowned Guru investor says that he gives more weight to take over transactions rather than valuation done by a DCF.
Readers on this forum know about Joel GreenBlatt's Magic Formula ( Buy good companies that are trading for cheap valuation). You will be pleasantly surprized to know that 5 of the 10 companies are also Magic Formula companies. EK, OSK, GME,EME and GYMB made the Magic Formula list
Conclusion: Many of the Guru value investors I have been reading about look at what a private equity investor would pay for a company. Hence, I have added the EBITDA multiple as another tool in my valuation toolbox.
Disclosure: I am long Gamestop (GME) via shares and call options at the time of publishing this post. I do not have positions in the other companies mentioned in this post. My positions may change at any time without any further updates. Please conduct your own research before considering investments based on these or any ideas on this blog. This post is to be considered as my research and not advice or a recommendation to buy or sell any of the stocks discussed.
What is out there to buy? Standard & Poor’s has come up with a list of 10 publicly traded companies that could be LBO targets, based on current market trends. Analysts at S&P Valuation & Risk Strategies chose companies in the consumer discretionary and industrial sectors, because these sectors, along with financials, have been especially active for buyouts. Also, they picked companies that have market values of $1 billion to $4 billion, in keeping with the size of recent top LBOs. And finally, they picked companies trading at less than their respective industry’s coming year-end price-to-earnings ratio, which would indicate that the market currently undervalues them.
S&P’s top pick for an LBO is Eastman Kodak, with a market capitalization of roughly $1.2 billion. Private-equity firm KKR already owns a stake in Eastman Kodak.
I am presenting the list along with their market cap, enterprise value, trailing P/E and EV/ EBITDA.
| Name (Ticker) | Market Cap (billions) | Enterprise Value (billions) | P/E (ttm) | EV / EBITDA |
| Eastman Kodak (EK, Financial) | 1.3 | 1.05 | 5.0 | 0.92 |
| Oshkosh (OSK, Financial) | 2.87 | 3.64 | 4.7 | 3.14 |
| GameStop (GME, Financial) | 3.11 | 3.12 | 8.86 | 3.8 |
| EMCOR Group (EME, Financial) | 1.76 | 1.31 | 12.32 | 4.28 |
| Cooper Tire & Rubber Co (CTB, Financial) | 1.39 | 1.53 | 16.51 | 4.13 |
| DSW (DSW, Financial) | 1.17 | 0.88 | 15.33 | 4.95 |
| TRW Automotive (TRW, Financial) | 3.98 | 5.45 | 9.8 | 4.23 |
| Dillard’s (DDS, Financial) | 1.59 | 2.25 | 15.5 | 4.64 |
| Alaska Air Group (ALK( | 1.79 | 2.43 | 12.38 | 4.57 |
| Gymboree (GYMB, Financial) | 1.32 | 1.02 | 12.21 | 4.74 |
The P/E ratio is the most commonly used ratio by investors. I like it for its simplicity and its usefulness in comparing a company with other competitors, its historic valuation as well as the general market or an index. However, P/E ratios can have their own pitfalls. For one, when looking at cyclicals you can be lulled into a false sense of cheapness by a low P/E. I wrote a post explaining how to value a cyclical using the 10 year average earnings.
EBITDA stands for Earnings Before Interest Tax Depreciation and Amortization. Private Equity (PE) firms more often than not use the EV/ EBITDA (EBITDA multiple) when evaluating deals. I wrote an article on the Use of EBITDA in valuation. In short, it helps them compare companies with different capital structures, tax rates, depreciation and amortization schedules. EBITDA is also often stated to be a rough equivalent of cash flow. Guru Investor Tom Russo also uses the EBITDA multiple as he is often investing internationally and he feels this is a good measure that can be used to compare companies across borders.
If you look at the table above, the P/E ratios for these firms are spread out from 4.7 to 16.5. However if you look at the last column, all the firms have their EBITDA multiples less than 5. This is an attractive valuation on the face of it. Chris Browne, a famous value investor, used to keep track of any acquisitions that would take place in the market along with the multiples paid for EBIT, Earnings, Cash flows etc. He would refer to this database when he would look at prospective investments. He called this as the ‘appraisal method’ of valuation. Michael Price, another renowned Guru investor says that he gives more weight to take over transactions rather than valuation done by a DCF.
Readers on this forum know about Joel GreenBlatt's Magic Formula ( Buy good companies that are trading for cheap valuation). You will be pleasantly surprized to know that 5 of the 10 companies are also Magic Formula companies. EK, OSK, GME,EME and GYMB made the Magic Formula list
Conclusion: Many of the Guru value investors I have been reading about look at what a private equity investor would pay for a company. Hence, I have added the EBITDA multiple as another tool in my valuation toolbox.
Disclosure: I am long Gamestop (GME) via shares and call options at the time of publishing this post. I do not have positions in the other companies mentioned in this post. My positions may change at any time without any further updates. Please conduct your own research before considering investments based on these or any ideas on this blog. This post is to be considered as my research and not advice or a recommendation to buy or sell any of the stocks discussed.
