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Want to know which stocks are ripe for activist takeovers? Well, there’s a simple formula you can use, and it’s called the enterprise multiple.
In this week’s edition of Watchlist Wednesday, we use it to highlight five stocks.
The enterprise multiple is a value metric that compares a company’s enterprise value to its operating profit.
Stocks that have a low enterprise value relative to operating profits are often withholding shareholder value, and the opportunity to unleash this value makes these stocks attractive to activists.
Enterprise Multiple Description
The enterprise multiple is discussed at length in books such as What Works on Wall Street by James O’Shaughnessy, Quantitative Value by Wesley Gray and Tobias Carlisle and Deep Value by Carlisle. It identifies undervalued, out-of-favor stocks with strong balance sheets.
Additionally, Tobias Carlisle uses extensive research to show this metric is used when identifying activist takeovers.
Rather than the more common price-to-earnings ratio, which uses market capitalization and net earnings, the enterprise multiple measures a company’s valuation based on its enterprise value to earnings before interest and taxes, or EBIT. Enterprise value is the cost to acquire an entire company. It differs from market capitalization because it accounts for a business’ debt and excess cash, not just equity.
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 status cloud its profitability.
Here is the enterprise multiple formula:
- Enterprise Multiple = Enterprise Value/EBIT
- Enterprise Value = (Market Capitalization + Total Debt + Minority Interest + Preferred Stock) – (Cash, Cash Equivalents + Short-term Investments)
- EBIT = Earnings Before Interest and Taxes
5 Stocks Ripe for Activist Takeovers
According to Enterprise Multiple stock screen on The Stock Market Blueprint, the following stocks have some of the lowest enterprise multiples among U.S. listed equities.
Molina Healthcare, Inc. (MOH): Offers Medicaid-related solutions and assists government agencies with administration of the Medicaid program.
- Market Cap: $2.9 Billion
- Enterprise Value: $-243 Million
- EBIT (TTM): $388 Million
- Enterprise Multiple: -0.63
- Closing price on 11/22/16: $52.00
magicJack VocalTec, Ltd. (CALL): Operates as a cloud communications company which allows users to make and/or receive free telephone calls with broadband internet access.
- Market Cap: $113 Million
- Enterprise Value: $61 Million
- EBIT (TTM): $21 Million
- Enterprise Multiple: 2.92
- Closing price on 11/22/16: $6.80
Natural Health Trends, Corp. (NHTC): A multi-level marketing firm engages in selling lifestyle enhancement products, cosmetics, personal care, and dietary supplements.
- Market Cap: $290 Million
- Enterprise Value: $195 Million
- EBIT (TTM): $58 Million
- Enterprise Multiple: 3.35
- Closing price on 11/22/16: $25.93
Greenbrier Companies, Inc. (GBX): Designs, manufactures & markets railroad freight car equipment and marine barges.
- Market Cap: $1.2 Billion
- Enterprise Value: $1.4 Billion
- EBIT (TTM): $393 Million
- Enterprise Multiple: 3.49
- Closing price on 11/22/16: $37.05
General Motors Co. (GM): Designs, builds and sells cars, trucks and automobile parts.
- Market Cap: $52 Billion
- Enterprise Value: $37.3 Billion
- EBIT (TTM): $9.9 Billion
- Enterprise Multiple: 3.77
- Closing price on 11/22/16: $33.81
What Works on Wall Street determined that the enterprise multiple was the best 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.” Deep Value says, “The enterprise multiple is the better metric when it comes to identifying undervalued stocks.”
Due to the nature of deep value strategies such as the enterprise multiple, average investors will find numerous reasons not to buy the above stocks. Disciplined investors, on the other hand, will find success following such a simple investment strategy.
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 The Stock Market Blueprint’s Shadow Stock Portfolio as it implements this strategy in real-time.
Mitchell Mauer is the Founder of TheStockMarketBlueprint.com. The Stock Market Blueprint is a site that finds value stocks for investors building long-term wealth. The site’s investment philosophy is anchored in principles established by Benjamin Graham and his most reputable followers over the last 100 years.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.