The 18 Cheapest Large Caps In Terms Of EV/EBIT With Strong Balance Sheets

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Includes: AMAT, ASML, BEN, BIDU, BRDCF, BRDCY, CEO, DAL, DGS, FUJHF, FUJHY, GOOG, GOOGL, HXSCF, IPXHF, IPXHY, JAPSY, LUKOY, MDTKF, MSFT, MU, OGZPY, SGTPY, SGTZY, SSL, SSNLF, SSNNF, TOELF, TOELY, VLKAY, WDC, WOPEF, WOPEY, YAHOF, YAHOY, YHOO
by: Ruerd Heeg

Summary

Companies with low EV/EBIT combined with strong balance sheets are great bets on a statistical basis.

In this article you will find a list with the large caps that combine a strong balance sheet with the lowest EV/EBIT multiples.

I compare these largecaps among each other and with other, better known largecaps. This comparison provides suggestions for pair trades and position switches.

Stocks of companies earning enough to pay for themselves quickly are great investments. Such stocks have a low multiple Enterprise Value/Earnings before Interest and Tax or EV/EBIT. Research has shown that this is one of the best measures for the valuation of stocks. It works even better in combination with strong balance sheets since a weak balance sheet is often the reason for a low EV/EBIT ratio. By a weak balance sheet I mean a high ratio Total Tangible Assets/Tangible Equity, btw.

Most of these stocks are unknown small caps but there are also a few large caps with a low EV/EBIT multiple and a strong balance sheet. If you do not want to invest in unknown but even cheaper small cap stocks you can also invest in the cheap large cap stocks with low EV/EBIT and strong balance sheets below.

So here are the search criteria:

  1. Market cap greater than 10 billion USD
  2. Enterprise Value/Earnings before Interest and Tax less than 8
  3. Tangible Assets less than twice Tangible Common Equity
  4. Earnings before Interest and Tax greater than zero

When restricting stock searches to largecaps the other search criteria have to be much more flexible to find any stocks. When using 15 million USD as a minimum market cap instead of 10 billion USD you can add criteria for the Piotroski score (higher than 6) and for the P/B (lower than 0.7). In addition it is possible to be more selective with the EV/EBIT for smallcaps, for instance by screening on EV/EBIT less than 5. Even with these 3 very restrictive criteria I typically find more smallcaps than the 18 largecaps below. So I think the returns from the stocks from such a smallcap search would be much higher. As you will understand comfort has a price, especially in investing.

For more explanation on this investment strategy see also my previous low EV/EBIT articles here, here and here.

See the list below.

Name

Ticker,

Piotroski Score

Country,

Business

Price

Market cap,

Enterprise Value in

billion USD

EV/EBIT

Yield (%)

Inpex Corp

(OTC:IPXHF) (OTCPK:IPXHY)

1605:TYO,

4

Japan,

oil and

natural gas

867 JPY

11.2,

13.4

3.6

2

SK Hynix

(OTC:HXSCF)

SEO:000660,

1

South Korea, memory (DRAM, NAND)

29599 KRW

17.6,

17.8

3.6

1

Fuji Heavy Industries

(OTCPK:FUJHY), (OTCPK:FUJHF)

TYO:7270,

US:FUJHY

8

Japan,

car manufacturer

3670 JPY

25.4,

19.2

4

2.9

Western

Digital Corp

(NASDAQ:WDC)

US:WDC,

6

US,

memory

(hard-disks, SSDs)

44.12 USD

10.3,

6.9

4.7

4.5

Gazprom PAO

(OTCPK:OGZPY)

LON:OGZD, US:OGZPY,

4

Russia,

state owned,

natural gas

and oil

3.56 USD

42.3,

72.8

4.9

14.5

Franklin

Resources

(NYSE:BEN)

US:BEN,

4

US,

asset management

& mutual funds

34.08 USD

20.2,

14.7

5.1

Surgutneftegaz

(OTCPK:SGTZY)

(OTCPK:SGTPY)

LON:SGGD, SGTPY:US,

5

Russia,

oil and

natural gas

5.14 USD

22.4,

15.1

5.5

19.8

Japan Airlines

(OTCPK:JAPSY)

TYO:9201,

5

Japan,

Airline

3970 JPY

12.7,

10.4

5.6

2.6

Samsung

Electronics

(OTC:SSNLF)

(OTC:SSNNF)

SEO:005930,

1

South Korea,

Chips,

consumer

electronics

1200000

KRW

158,

117

5.6

1.7

Bridgestone

Corp

(OTCPK:BRDCY)

(OTC:BRDCF)

TYO:5108

4

Japan,

tires and

other rubber products

3921 JPY

28.2

27.3

6

3.3

Sasol (NYSE:SSL)

US:SSL,

6

South Africa,

coal, oil and

natural gas

28.27 USD

18.5,

18.4

6

4.2

CNOOC (NYSE:CEO)

HKG:0883, US:CEO,

4

China,

state owned,

oil and

natural gas

104 USD

46.5,

52.6

6.7

6.7

Woodside

Petroleum

(OTCPK:WOPEF),

(OTCPK:WOPEY)

ASX:WPL,

2

Australia,

oil and

natural gas

28.1 AUD

16.6,

21.3

6.8

10.4

Lukoil (OTCPK:LUKOY)

LON:LKOD, US:LUKOY

5

Russia,

oil and

natural gas

33.14 USD

28.2,

38.4

6.8

6.4

Hyundai Mobis

Co

SEO:012330,

1

South Korea,

auto parts

259,000 KRW

20.5,

17.7

7.4

1.1

MediaTek

(OTC:MDTKF)

TPE:2454,

4

Taiwan,

chip manufacturer

221 TWD

10.4,

7.1

7.4

10

Tokyo Electron

(OTCPK:TOELF),

(OTCPK:TOELY)

TYO:8035,

5

Japan,

Equipment for

chip manufacturers

6932 JPY

10.1,

8.1

7.5

2.7

Yahoo Japan

Corporation

(OTCPK:YAHOF),

(OTCPK:YAHOY)

TYO:4689,

US:YAHOY

Japan,

Internet search

Services

429 JPY

21.6,

17.4

8

2

Click to enlarge

There are many resource companies in the list. Many investors think that the Russian oil companies are the cheapest in their class. However within this list the Japanese Inpex is the winner in terms of EV/EBIT. It is also very cheap in terms of P/B (tangible). Inpex' P/B is 0.5 while Surgutneftegaz P/B is 0.45. Lukoil's P/B is lower at 0.3. Gazprom's P/B is also 0.3. The other 2 oil companies, CNOOC, Sasol, and Woodside Petroleum have much higher values of P/B. Again comfort has a price. Here I wrote I could not find a good reason why Inpex Corporation seems to be cheaper than the Russian oil- and gas exploration companies. While looking at this month's list I found a good reason: Inpex Corporation's dividend yield is much lower than the yield of other oil- and gas exploration companies and in particular lower than its Russian peers. If the yield is not there yet then that is something that can change for the better. So I do not think Inpex investors should swap their position for a higher yield.

The chip companies SK Hynix, Samsung Electronics and Micron Technology (NASDAQ:MU) were 2 months ago still in this list generated by the screener but now not anymore. So I looked into what happened. In the case of Samsung Electronics and SK Hynix this is because of an anomaly in the Reuters-Thomson financial database that is used by my screener. I also think that the low Piotroski score of the South Korean companies in the list is a screener anomaly. But why did Micron drop from the list? Micron Technology is also still cheap but just fails to satisfy my balance sheet criterion. For Micron EV/EBIT is equal to 7.6. The multiple for Samsung Electronics is 5.6 and for SK Hynix the multiple is 3.6.

This big difference between the multiples of SK Hynix, Samsung Electronics and Micron indicates that Micron's stock could go much lower, or that the other 2 stocks could go much higher. I think the reasons for Micron's higher multiple are that Micron is listed in the US, is more diversified than SK Hynix and has better intellectual property than Samsung Electronics and SK Hynix. In particular I think 3D XPoint memory and the Automata processor are high-impact inventions distinguishing Micron from the other chip manufacturers. A third reason for Micron's higher EV/EBIT multiple is that going forward Micron's EBIT might increase. That could be a consequence of Micron's acquisition of the remaining 2/3 of Inotera for a very low price, at least in terms of Inotera's EV/EBIT multiple. As I wrote in my previous low EV/EBIT article Micron's management has a history of good asset allocation. The recent Inotera transaction was (probably) another demonstration of such good asset allocation. However a reason for SK Hynix's low EV/EBIT multiple might be certain problems in its operating history. For example in the fall of 2013 there was a huge fire in 2 of its Chinese factories. I expect any related stock price discount to disappear over time.

Another technology company, Western Digital, remains in the list compared to 2 months ago. About 5 years ago I bought at 38 USD and sold at 70 and 84 USD. Now the stock is back to 44 USD. Today however I would not pay a dime for this stock. I think most of Western Digital's core business, hard disks, will be obsolete soon. Within 5 years new electronic devices will not use hard disks anymore. Also within datacenters hard disks will be replaced by SSD's. Furthermore I do not like Western Digital's acquisition of SanDisk (NASDAQ:SNDK). First I do not like it because it will make Western Digital a pretty leveraged company. Second I do not like it because I think the price for SanDisk is too high.

The Taiwanese MediaTek however seems to be an interesting chip manufacturer. It has a higher EV/EBIT multiple than Samsung Electronics and SK Hynix. Unlike Samsung Electronics and SK Hynix it seems to be more active in niche markets than the other 2 chip manufacturers. In addition it has a high yield of 10%. It is advantageous for Taiwanese companies to pay out a large part of their profit. As a side note the WisdomTree Emerging Markets SmallCap Dividend ETF (NYSEARCA:DGS) invests a lot in Taiwan. To limit the effects of small tail risks (such as a Chinese invasion in Taiwan) the fund uses sector and country caps.

Tokyo Electron is also a very interesting company. It competes with other producers of chip manufacturing equipment such as Applied Materials (NASDAQ:AMAT) and ASML (NASDAQ:ASML). In the beginning of 2015 Applied the company tried to merge with Applied Materials. However after objections from Samsung Electronics and SK Hynix to regulatory authorities the deal was scrapped. This failed deal might still depress the price. Both Applied Materials and ASML are much more expensive in terms of the EV/EBIT multiple than Tokyo Electron. I also think that Tokyo Electron does not trade in the US has to do with this valuation difference.

How about Japan Airlines? I do not find airlines in general interesting stocks. In particular not now because the profitability boost from the current low oil price will be competed away and the oil price could go up again. So I would skip the airline transportation sector. But if you would like to diversify into different sectors then why not invest in Japan Airlines? This company may not be the cheapest airline in terms of the EV/EBIT multiple but it has the added advantage of a strong balance sheet. For example Delta Airlines (NYSE:DAL) has a similar EV/EBIT multiple but has a much more leveraged balance sheet (again in terms of Total Tangible Assets/Total Tangible Equity).

I really recommend such comparisons for investors in largecaps. Another example is Fuji Heavy Industries. In my previous low EV/EBIT article I suggested comparing Hyundai Mobis (SEO:012330) with Volkswagen AG (OTCPK:VLKAY). An even better pair trade might be between Fuji Heavy Industries and Volkswagen AG, with Volkswagen as the short leg.

Lastly my 2 cents on Yahoo Japan Corporation. Investors like to invest in the big names whose products they use, as consumers. So these big names tend to be overvalued. Examples in the internet search sector are Google (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Yahoo (NASDAQ:YHOO) and Baidu (NASDAQ:BIDU). Without doubt these are beautiful companies but why not also invest in something that is unknown and cheaper? This is probably Yahoo Japan Corporation.

Disclosure: I am/we are long MU, LUKOY.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I might buy some shares Surgutneftegaz as well.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.