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When looking for value stocks, the Enterprise Value (EV)/EBITDA and EV/Free Cash Flow (FCF) ratios are a set of useful valuation metrics. When using the Screener.co Equity Research Platform, I generally look for companies where both metrics are less than 7. I have been burned by companies with high debt loads in the past, so I usually couple these valuation metrics with a condition that only returns companies whose total debt is less than twice its most recent fiscal year's EBITDA. That usually limits the list of companies to a few hundred out of the 6,000+ that are publicly traded on US exchanges. From that list, I can pick the interesting ones to further research and determine whether or not I am interested in tracking the companies or buying their stocks. Let's run the following screen:

Field
op
Criteria
Exchange Country
=
"USA"
Exchange Traded On
!=
"Over The Counter"
Current EV/Free Cash Flow
<
7
Current EV/EBITDA
<
7
Total Debt(I)
<
EBITDA(A) * 2

As of 9/5/2011, this screen returns 220 results. From that list, there are 11 stocks that look interesting, 5 of which I have already decided to go long on by using similar screens:

Ballantyne Strong (BTN) is a services company that installs equipment in movie theaters. They have benefitted both from general economic conditions, international expansion, and the trend of theaters upgrading their equipment to support 3D movies. The company has a market capitalization of $52.5 million relative to TTM revenue of $147.7 million and an EV/Revenue multiple of 0.2x. Looking at its valuation as a multiple of profitability metrics, it has an EV/EBITDA ratio of 2.1x and an EV/FCF multiple of 6.8x. From a balance sheet perspective, the company had net tangible assets in the most recent quarter of $57.5 million, implying that its net tangible assets represent 109.5% of its market cap (it is unusual for a non-financial company to trade at a discount to its net tangible assets). The company reported net income in the most recent fiscal year of $8.4 million relative to $2.1 million in the year prior and -$3.0 million in the year before that. The company's low valuation multiples and poor performance during the recession are likely a product of the cyclicality of the Ballantyne's market (new movie theaters and equipment upgrades are generally not made during recessions). Nevertheless, I have been long on BTN given the healthy balance sheet, recent traction in international sales, and what I believe to be an attractive risk/reward trade-off resulting from depressed valuation multiples.

LoJack Corporation (LOJN) is a vehicle tracking and recovery company with a market capitalization of $58.3 million. It had TTM revenue of $142.4 million and an EV/Revenue multiple of 0.1x. LoJack has an EV/EBITDA ratio of 1.1x and an EV/FCF multiple of 1.5x. The company had net tangible assets in the most recent quarter of $31.6 million, implying that its net tangible assets represent 54.1% of its market cap. The company had TTM net income of $4.1 million and the company looks like it is in the process of right-sizing its expenses given that its most recent fiscal year net income was -$18.3 million. I recently went long on LOJN because of its reasonably healthy balance sheet, attractive valuation multiples, and the fact that it looks like the company is being successfully turned around.

Network Engines (NEI) is a company that sells network appliances through IT services companies and OEM partners. It has a market capitalization of $53.8 million relative to TTM revenue of $263.7 million and an EV/Revenue multiple of 0.1x. It has an EV/EBITDA ratio of 5.2x and an EV/FCF multiple of 6.7x. From a balance sheet perspective, the company had net tangible assets in the most recent quarter of $54.6 million, implying that its net tangible assets represent 101.3% of its market cap (again, another profitable company trading at a discount to its net tangible assets). The company reported net income in the most recent fiscal year of $1.5 million after reporting net losses in each of the two prior years. I went long on NEI at a lower entry point, when it was trading at a larger discount to its net tangible assets, and maintain the position. Despite losing business from a major account, the company issued a press release prior to the most recent quarter's earnings indicating that they expect to remain profitable.

RCM Technologies (RCMT) is an IT services company with a market capitalization of $60.9 million. It had TTM revenue of $149.1 million and an EV/Revenue multiple of 0.3x. It has an EV/EBITDA ratio of 3.9x and an EV/FCF multiple of 6.5x. From a balance sheet perspective, the company had net tangible assets in the most recent quarter of $63.8 million, implying that its net tangible assets represent 104.8% of its market cap. The company has an estimated long-term EPS growth rate of n/a and reported net income in the most recent fiscal year of $5.8 million relative to $6.9 million in the year prior and a large net loss in the year before that. I have been long on RCMT for a while; it is yet another example of a cyclical but profitable company trading at a discount to its net tangible assets. Unless you are convinced that we are headed for a deep recession, these companies look attractive.

Research In Motion (RIMM) is the blackberry device OEM and has a market capitalization of $15.7 billion. It had TTM revenue of $20.6 billion and an EV/Revenue multiple of 0.6x. RIMM has an EV/EBITDA ratio of 2.5x and an EV/FCF multiple of 6.2x. The company had net tangible assets in the most recent quarter of $6.9 billion, implying that its tangible assets represent 43.8% of its market cap. It has an estimated long-term EPS growth rate of 11.5% and reported net income in the most recent fiscal year of $3.4 billion relative to $2.5 billion in the year prior and $1.9 billion in the year before that. Despite its healthy balance sheet, consistent profitability, and its participation in the rapidly growing smart phone market, the company is trading at relatively low valuation multiples as a result of its recent underperformance and the pressure it is facing from Android and iOS devices. I have been tracking RIMM for a while but have not pulled the trigger; its market position is definitely being threatened by other smart phone OEMs and platforms and its long term outlook seems very uncertain.

SanDisk (SNDK) is a manufacturer of flash data storage cards with a market capitalization of $8.4 billion. It had TTM revenue of $5.2 billion and an EV/Revenue multiple of 1.4x. It has an EV/EBITDA ratio of 4.2x and an EV/FCF multiple of 5.3x. SNDK had net tangible assets in the most recent quarter of $5.9 billion, implying that its net tangible assets represent 70.3% of its market cap. The company has an estimated long-term EPS growth rate of 12.9% and reported net income in the most recent fiscal year of $1.3 billion relative to $415.3 million in the year prior and -$2.1 billion in the year before that. The company's poor performance in the two year prior annual period can be attributed to the recession and the cyclicality of data storage companies. The significant cyclicality, and the lack of a compelling discount to net tangible assets (in fact, it is trading at a premium to net tangible assets) is why I have held off on SanDisk.

STEC (STEC) is a manufacturer of enterprise solid state storage systems with a market capitalization of $467.1 million. It had TTM revenue of $357.4 million and an EV/Revenue multiple of 0.7x. It has an EV/EBITDA ratio of 3.7x and an EV/FCF multiple of 4.4x. STEC had net tangible assets in the most recent quarter of $349.1 million, implying that its net tangible assets represent 74.7% of its market cap. The company has an estimated long-term EPS growth rate of 30.6% and reported net income in the most recent fiscal year of $28.5 million relative to $72.6 million in the year prior and $4.3 million in the year before that. STEC products are priced at a premium to other, less functional, solid state storage devices. However, I have held off on STEC because I am not convinced that they will be able to maintain their margins as the lower-end commodity solid state storage systems become better while offering a substantial cost advantage.

Xyratex (XRTX) is a storage subsystem company with a market capitalization of $240.4 million. It had TTM revenue of $1.5 billion and an EV/Revenue multiple of 0.1x. Looking at its valuation as a multiple of profitability metrics, it had an EV/EBITDA ratio of 1.6x and an EV/FCF multiple of 1.7x. From a balance sheet perspective, the company had Net Tangible Assets in the most recent quarter of $346.8 million, implying that its net tangible assets represent 144.3% of its market cap. The company reported net income in the most recent fiscal year of $139.4 million relative to -$16.4 million in the year prior and -$47.9 million in the year before that. Despite the cyclicality of the company's market and its customer concentration issues, I am long XRTX because the discount to net tangible assets is significant and the company expects to return to profitability shortly after reporting a loss in the most recent quarter. The multiples of revenue, EBITDA, and FCF are incredibly low so the worst case scenario already appears to be priced into the stock.

FXCM (FXCM) is a retail Forex trading platform and service with a market capitalization of $183.9 million. It had TTM revenue of $518.9 million and an EV/Revenue multiple of 0.4x. FXCM had an EV/EBITDA ratio of 1.9x and an EV/FCF multiple of 5.9x. The company had net tangible assets in the most recent quarter of $43.4 million, implying that its net tangible assets represent 23.6% of its market cap. The company reported net income in the most recent fiscal year of $146 thousand relative to $6.3 million in the year prior and an essentially breakeven year before that. I am not keen on retail forex companies so I have held off on this one.

Journal Communications (JRN) is a media company with a market capitalization of $177.2 million. It had TTM revenue of $379.3 million and an EV/Revenue multiple of 0.6x. It has an EV/EBITDA ratio of 3.3x and an EV/FCF multiple of 5.8x. JRN had net tangible assets in the most recent quarter of $104.2 million, implying that its net tangible assets represent 58.8% of its market cap. The company reported net income in the most recent fiscal year of $34.4 million relative to $4.3 million in the year prior and a massive $224 million loss in the year before that. I am bearish on traditional media (newspapers, TV, and radio) and am unwilling to pay nearly 6x free cash flow for a company in a market that challenged when there would seem to be more attractive opportunities elsewhere.

Lexmark International (LXK) is a computer printer manufacturing company with a market capitalization of $2.4 billion. It had TTM revenue of $4.2 billion and an EV/Revenue multiple of 0.4x. LXK has an EV/EBITDA ratio of 2.6x and an EV/FCF multiple of 4.3x. It had net tangible assets in the most recent quarter of $1.3 billion, implying that its net tangible assets represent 53.4% of its market cap. The company has an estimated long-term EPS growth rate of -5.5% and reported net income in the most recent fiscal year of $340.0 million relative to $145.9 million in the year prior and $240.2 million in the year before that. Given the substantially negative outlook for the company's EPS, I am holding off despite the very attractive valuation multiples.

* All data sourced from Screener.co.

Source: 11 Value Picks With Low EV/EBITDA And EV/FCF Ratios And Manageable Debt